Since 2001, the US government has operated a budget deficit (spending exceeds revenues).
For an example of what the federal budget looks like, here is a snapshot of the fiscal year 2018 budget:
Total Revenue: $3.422 trillion
Total Spending: $4.407 trillion
Budget Deficit: $984 billion
To finance the deficit, the Treasury sells government bonds (debt), which is another form of borrowing money. Investors, businesses, and foreign governments purchase these bonds and lend money to the US with a promise of future payment.
Historically, governments have slipped into a deficit during recessions and economic downturns. However, in the aftermath of the 2008-2009 recession, it has been the norm for governments to be running at a deficit.
So, what are the pros and cons of a deficit?
One of the main objectives of a deficit is to stabilize the economy when it is in panic mode. So, if businesses are not investing or hiring labor, the government stimulates the economy through public-works projects (such as building bridges or high-speed rail lines). This way, the government can plug gaping holes in the economy.
If interest rates are low, the government can pay very little to invest in the country, whether it is on nationwide repairs to bridges and sewers or new infrastructure across the country. This could generate a huge return on investment (ROI) in the long run.
A budget deficit adds to the national debt, creating problems for present and future generations.
When the deficit adds to the overall debt, taxpayers are on the hook for greater interest payments. This might not be a concern in a low-interest-rate environment, but when rates go up, the government pays more to service the debt.
If the government pays more interest, then it needs to take money away from other programs. This results in staffing shortages and supply problems.
To cover today’s deficit-financed spending, the government will have to make the next generation of taxpayers cover the bill. This is typically in the form of new taxes or hikes to current ones.
When there is a financial crisis in the economy, the government has fewer resources to act. It would not be able to go deeper into a deficit without facing strain on the budget.
Crowding out is a major issue in financial markets. Because the private sector is lending money to the government to finance the deficit, it has fewer funds to spend and invest elsewhere. Another problem is that the government is generally far less efficient than the private sector, so the resources might be wasted and misallocated.
On A Budget
Since the US budget is in a deficit, the government needs to keep borrowing money and increasing the national debt. Many economists have been sounding the alarm that drastic action needs to be taken to shrink the debt, whether it is in the form of tax hikes or spending cuts – or both.
To fathom how enormous the debt is, consider this: A sustainable level of debt is when the debt-to-GDP (gross domestic product) ratio is anything below 77%. According to the Federal Reserve of St. Louis Economic Data, America’s debt-to-GDP ratio is 103%. Are you scared yet?