Consider just how large the U.S. economy is – all the products and services that are produced in a single year. Now consider that the national debt – the total amount of debt owed by the federal government – exceeds the total yearly output of our economy.
That’s a lot of debt, and it’s caused by yearly budget deficit spending.
With news that the current year’s budget deficit increased 77% over the past year, there is renewed attention in Washington, D.C., to federal spending. The annual budget process is also underway, which means even more talk about deficits and debt. So what are deficits, debt, and how are they related? And what about the trade deficit?
The Budget Deficit
Simply put, the budget deficit is when the federal government spends more than it receives in revenue in one fiscal year. The current fiscal year began on October 1.
The Treasury Department recently released spending data for the first four months of this fiscal year.
- Total money received by the government was $1.111 billion.
- Total spending, however, was $1.421 billion.
- This leads to a budget deficit of $310 billion.
- This compares to a deficit of $176 billion during the same time period last year, or a $135 billion increase.
The Congressional Budget Office estimates that the national debt will reach $897 billion this fiscal year.
For a few years in the late 1990s, the federal government had a budget surplus – it spent less than it received in revenue. In the years since (and many of the years prior), the government runs a budget deficit.
The National Debt
Budget deficits lead to debt because the government borrows money to pay for yearly deficit spending. The national debt is the total amount of money that the federal government owes. This is the money it borrowed to finance the yearly deficits. This debt is, in essence, the accumulated total of the budget deficits run by the federal government.
The government finances this debt in two ways.
- Borrowing. This is done by selling bonds to investors who are promised a certain rate of interest.
- Issuing debt to government trust funds that have surpluses. For instance, in years past the Social Security Trust Fund routinely collected more money than it paid in benefits. The Treasury then used that money to finance deficit spending, issuing notes that promise to repay what it borrowed.
As of March 7, 2019, the total federal debt was $22.029 trillion. The national debt has grown dramatically over the past decade. On September 30, 2008, the debt stood at $10.025 trillion.
The Treasury Department releases up-to-date figures on the national debt here.
Comparisons to Gross Domestic Product
The Gross Domestic Product (GDP) is the sum total of goods and services produced in the U.S. economy. The US. GDP in 2018 was $20.891 trillion.
Some observers find it useful to compare the yearly deficit and total debt to the GDP, since this gives an idea about deficit spending and debt in terms of our economic size.
- In 2018, the budget deficit equaled 3.8% of total economic activity. During the Great Recession, the budget deficit had equaled 9.8% of total economic activity (in 2009).
- In the last quarter of 2000, the national debt equaled 54.2% of the yearly economic activity. In the third quarter of 2018, the debt equaled 104% of the yearly economic activity.
The Trade Deficit
The trade deficit has also been in the news recently, with reports that it hit the highest level since 2008. This deficit does not involve government spending; instead, it is the gap between the amount of goods and services exported by businesses in the United States and the amount imported for consumers in the United States.
The federal government labels this the “goods and services deficit,” although it is generally known as the trade deficit.
In 2018, the trade deficit reached $621 billion. That is an increase of $68.8 billion from 2017’s deficit, which was $552.3 billion.
What Does This Mean for You?
Ultimately, the national debt must be paid. Besides the question of paying back the actual debt, interest payments on the debt replace spending that could go to other programs. The Congressional Budget Office sums up the problems of high long-term debt: “High and rising federal debt would reduce national saving and income, boost the government’s interest payments, limit lawmakers’ ability to respond to unforeseen events, and increase the likelihood of a fiscal crisis.”
The solution to these long-term problems is to raise taxes, cut spending, or default on the debt (or a combination of two or three of these options). Any of these options will affect every American, since we all pay taxes, rely on government services, and depend on a sound financial system.
The annual budget process helps determine the annual deficit and plays a large role in determining the trajectory of future debt. This process has just begun with the release of President Trump’s budget proposal.