BUDGET DEFICIT AND PUBLIC DEBT
A budget deficit occurs when a country, business, or an individual has spending that is greater
than the revenue they receive over a specific period—usually measured as a year. When
spending exceeds revenue—or income—it's called deficit spending. On a government-level,
the national debt is the accumulation of each year's deficit. For a business or individual, this
would be their total debt.1
When the revenue exceeds the spending, it creates a budget surplus. A surplus will reduce debt.
How the Deficit Affects the Debt
The U.S. Treasury must sell Treasury bonds, bills, and notes to raise the money to cover the
deficit and fund regular government operations. This type of financing is known as public debt
since these bonds are sold to the general public. Treasury debt is considered one of the most
secure investments in the world because these debt securities have the backing of the U.S.
government.2
In addition to the public debt, the government regularly loans money to itself. This
intragovernmental debt is in the form of Government Account Series securities. Most of these
funds come from the Social Security Trust Fund.
That happened in the past when payroll taxes provided more than enough income to cover all
Social Security benefits and the pot of funds grew. That's because there were more baby boomers
working than there were retirees pulling benefits. However, as the number of baby boomers
retiree grow, there need to be enough younger workers paying the taxes needed to cover boomer
benefits.
When there is a greater demand for outgoing funds for retirees then an inflow of funds from
worker's taxes, the Social Security payments will add to the deficit and the debt. To avoid this,
one of three things must happen.
1. Payroll taxes must be raised
2. Benefits must be lowered
3. Other programs must be cut
Legislators continue to debate the best solution.
How the National Debt Affects the Deficit
The national debt will affect the budget deficit in three primary ways. First, the debt gives a
better indication of the true deficit each year. You can more accurately gauge the deficit by
comparing each year's debt to the previous year's debt. That's because the deficit, as reported in
each year's federal budget, does not include all of the amount owed to the Social Security Trust
Fund borrowed during the use of intragovernmental funding through the issuing of Government
Account Series securities.
That amount owed is called off-budget.5
Second, the interest due on the Treasury bonds, notes, and bills and other government borrowing
adds to the deficit each year. About 1.7% of GDP goes toward debt interest payments. 6 Interest
on the debt hit a record in FY 2019, reaching $575 billion. That beat its previous record of $523
billion in FY 2018. In the FY 2013 budget, the interest payment dropped to $416 billion.7
Third, the debt decreases tax revenues in the long run, which further increases the deficit. As the
debt continues to grow, creditors become concerned about how the U.S. government will repay
any funds it owes. Over time, creditors may claim the deficit increases their risk if they buy
Treasury debt products. They may demand higher interest rates to offset any perceived increased
risks. Raising those rates may dampen economic growth.
The U.S. national debt exceeded $22 trillion on February 11, 2019. That's more than triple the
nearly $6 trillion debt in 2000.
How Debts and Deficit Spending Affect the Economy
Initially, deficit spending and the resultant debt will boost economic growth, especially if the
country is in a recession. Deficit spending increases the amount of money in the economy.
Whether the money goes to jet fighters, bridges, or education, it ramps up production and creates
jobs. In the long run, debt can damage the economy because of higher interest rates.
