Budget deficit



Budget Deficit

Introduction

A national government budget deficit occurs when expenditure exceeds tax and fee revenue in a single fiscal year. In this case, the government must borrow to make up the difference. Therefore, a deficit causes the Gross Debt to increase. For example, U.S. federal government expenditures exceeded its revenues by $363 billion in 2007. Thus, the Gross Debt increased from about $8.5 trillion at the end of 2006 to about $8.9 trillion at the end of 2007.

The official deficit reported by the U.S. Treasury in 2007 was $162 billion. Note that this is less than the $363 billion figure just cited. The smaller figure results from the fact that the official deficit includes the “surplus” in the Social Security program. The government spends Social Security surpluses each year. Because the surpluses are spent, when Social Security receipts eventually fall short of benefits paid (around 2017), the difference must be made up by public bond sales, or by increased taxes, or by decreased spending. Public finance economists argue, therefore, that a more accurate accounting of growth in the debt would exclude Social Security surpluses from the deficit. In this case, the $363 billion figure is a more precise measure of the increase in the debt than the official deficit reported by the Treasury.

Recall that the absolute dollar amount of the national debt does not convey its impact on the economy because the size of the economy grows over time. Economic scale also affects the economic impact of a country's deficit. The preceding figure indicates that the Gross Debt/GDP ratio reached its highest recorded value at the end of WWII. At that time, the deficit/GDP ratio also reached its highest value, about 13%. In 1983, the ratio reached a postwar record of 4.9% (see Figure 36.1). In 2008 the deficit/GDP had fallen to about 2.8%. However, at this writing, the Congressional Budget Office has predicted that the recession that began at the end of 2007 could drive the ratio above 8% in fiscal 2009.

Discussion

Every year, the federal government enacts a budget that allocates government funds toward different spending programs. In deciding how much the government should spend in a given year, lawmakers have to take into account how much the government receives in revenue through taxes and fees. In years when the government spends less than it takes in, the budget is said to be in surplus. Conversely, if the government spends more money than it receives, the result is a budget deficit (Nugent, 2003).

In years when there is a deficit, the government is forced to borrow money to finance its spending commitments and obligations. The borrowing process occurs when the Treasury Department sells government bonds through Wall Street traders to institutional investors and private citizens, both in the U.S. and abroad.

The federal budget was generally in surplus throughout the nation's early history. Over the period between 1789 and 1849, cumulative budget surpluses and deficits yielded a net surplus of $70 million. The latter half of the 19th century saw a ...