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Explainer: What you should know about federal deficits

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What just happened?

The White House Office of Management and Budget recently released a forecast that the federal deficit would exceed $1 trillion this year. As Fox News points out, this would be the first time since the four years following the Great Recession that the deficit reached that level.

What is the federal deficit?

The term federal deficit refers to the federal government’s fiscal year budget deficit. Such a deficit occurs when total outgoing expenditures (such as for buying military aircraft or paying government salaries) exceeds the revenues collected in the form of taxes and fees. Deficits are measured over the course of the fiscal year, which runs from October 1 through September 30. Net interest payments, which measure inflows and outflows on interest from the federal debt, are included in deficit and surplus outcomes.

What is a federal surplus?

If the government collects more in taxes than it spends, then it has incurred a surplus. In the past fifty years, the government has only recorded budget surpluses in five years: 1969, 1998, 1999, 2000, and 2001.

What is the difference between the federal debt and the national deficit?

The federal deficit is the difference between what the federal government brings in each year in revenues (i.e., taxes and fees) and what it spends during that same fiscal year. The national debt is the accumulation of all federal government borrowing activity from private citizens, institutions, and domestic and foreign governments. Deficits have historically been the largest contributor to the federal debt.

What is a structural deficit?

In theory, deficits should shrink or disappear when the economy is growing since the government does not have as many expenses (e.g., unemployment payments) and increase only during economic slowdowns or recessions. Structural deficits, though, are budget conditions that produce deficits in all economic conditions because the government is structured in a way to continuously outspend its revenues.

How do current deficits affect future deficits?

Deficits increase the debt, which increase the interest payments on the debt, which can increase deficits, etc.—a vicious cycle of spiraling debt.

What was the peak for federal deficits?

To make historical comparisons between deficits we need to look at them as a percentage of GDP, which allows us to see the size of the deficit in relation to the entire U.S. economy. Based on this we find that the federal deficits peaked during World War I (17% of GDP in 1919) and World War II (24% in 1945).

Over the next decade, the Congressional Budget Office estimates that annual deficits will average 4.4 percent of GDP. Over the past fifty years including the Great Recession and its immediate aftermath, deficits have averaged only 2.9 percent of GDP.

What was President Trump’s position on deficits during his 2016 campaign?

During the 2016 presidential campaign, Trump promised not only to eliminate deficits but that he would eliminate the nation’s debt in eight years. Instead, his budgets would add $9.1 trillion during his tenure (assuming he is reelected). Based on the estimate of his own administration, his deficits would increase the U.S. debt to $29 trillion.

Why do deficits matter?

Deficits matter because they increase the total debt. According to the CBO, the budget deficits over the next 30 years are projected to drive federal debt held by the public to unprecedented levels—from 78 percent of gross domestic product (GDP) in 2019 to 144 percent by 2049. This matters because the national debt is almost always an unjust form of an intergenerational wealth transfer.

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Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

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