9.5 Deficits and the National Debt

Notes

• A budget deficit occurs when government spending is greater than revenue in a year. A budget surplus occurs when revenue is greater than spending. The federal budget last had surpluses in fiscal years 1998 to 2001.
• The national debt is the total amount the federal government owes: the sum of past deficits minus past surpluses.
• The government borrows by selling Treasury securities (bills, notes and bonds) to individuals, businesses, foreign investors and other governments, and some debt is held by federal trust funds.
• Worked example: if revenue is $4.5 trillion and spending is $5.8 trillion, the deficit is $5.8 - 4.5 = 1.3$ trillion dollars, and the debt grows by about that amount.
• Economists often compare debt to the size of the economy using the debt-to-GDP ratio.
• Concerns raised about large debts include rising interest costs, less money for other priorities, and crowding out, when government borrowing raises interest rates and reduces private investment. Others argue that borrowing during recessions or for investments such as infrastructure can be worthwhile.