Current US Federal Budget Deficit
3 Reasons the US Deficit Is Out of Control
The U.S. federal budget deficit for fiscal year 2021 is $966 billion. FY 2021 covers October 1, 2020, through September 30, 2021. The deficit occurs because the U.S. government spending of $4.829 trillion is higher than its revenue of $3.863 trillion.
The deficit is lower than last year. The FY 2020 budget created a $1.083 trillion deficit. Spending at $4.79 trillion was more than the estimated $3.706 trillion in revenue.
Difference Between the Deficit and Debt
A budget deficit occurs when government spending is greater than the revenue collected. When spending exceeds revenue—or income—it's called deficit spending. The national debt is the accumulation of each year's deficit.
When the revenue exceeds the spending, it creates a budget surplus. A surplus will reduce debt.
There is a difference between the deficit and the debt. The U.S. government can use surplus Social Security funds to make the deficit look smaller. As a result, the debt by year will be a little larger than the deficit by year.
Three Reasons for the Current Budget Deficit
Many people blame the deficits on entitlement programs. But that's not supported by the budget. These enormous deficits are the result of three factors.
War on Terror
First, the attacks on 9/11 led to the War on Terror. It's added $2.4 trillion in Overseas Contingency Operations (OCO) to the debt since 2001. As a result, defense spending rose to a record $855 billion in 2012. That includes the defense department budget OCO, and increases for the Department of Veterans Affairs, Homeland Security, and the National Nuclear Security Administration.
The Trump administration will continue to have high defense spending. It is estimated to reach $936 billion in FY 2020. That also includes OCO, the VA, Homeland Security, and the NNSA.
U.S. military spending is greater than the next 10 largest government expenditures combined. It's almost three times greater than China's military budget, and 10 times bigger than Russia's defense spending. It's difficult to reduce the budget deficit without cutting U.S. defense spending.
Second is the impact of tax cuts. They immediately reduce revenue for each dollar cut. Proponents of supply-side economics argue that the government will recoup that loss over the long term by boosting economic growth and the tax base. But the National Bureau of Economic Research found that only 17% of the revenue from income tax cuts was regained. It also found that 50% of the revenue from corporate tax cuts was lost.
For example, the Bush tax cuts added $2.023 trillion to the debt between 2011 and 2020. The Congressional Research Service estimated that service cost on that debt would add another $450 billion.
Going forward, the Trump tax cut will reduce revenue. It's reducing the personal income tax rate, corporate taxes, and small business taxes. These cuts total $1.5 trillion over the next 10 years. But the Joint Committee on Taxation said the cuts would stimulate growth by 0.7% annually. The increased growth will add revenue, offsetting some of the tax cuts. As a result, the deficit will increase $1 trillion over the next decade.
Unfunded Mandatory Spending
Lastly is unfunded elements of mandatory spending. Some people point to the $1 trillion cost of Social Security as a contributor to the deficit. But it's funded through payroll taxes and the Social Security Trust Fund until 2034.
Medicare will cost $722 billion in FY 2021. Around 60% of it is paid for by payroll taxes and premiums.
The rest of the mandatory budget adds to the deficit. This includes Medicaid, which will be $448 billion in FY 2021. Medicaid provides health care to those with low incomes.
The mandatory budget also includes $645 billion in income support programs for those who can't provide for themselves. This includes welfare programs like TANF, EITC, and Housing Assistance. It also includes unemployment benefits for those who were laid off. Student loans help create a more highly skilled workforce. Other retirement and disability programs are for those who were former federal employees. These include civil servants, the Coast Guard, and the military.
Only an Act of Congress that amends a program's benefits can change mandatory spending. That would require a majority vote in both houses and is thus unlikely to happen.
Why the Government Always Overspends
The difference between the U.S. government and you is that the president and Congress overspend on purpose. Politicians realize that, the more the government spends, the more it stimulates the economy. That's because government spending is itself a component of gross domestic product. They are rewarded by voters for creating jobs and growing the economy. They lose elections for raising taxes and unemployment.
In the United States, corporations have gained the right to make donations for political advertising. They support the idea that tax cuts are the best way to create jobs. They convince people that trickle-down economics is a solution that works for everyone. As a result, politicians no longer seriously try to balance the budget.
Most governments that consistently increase deficits are punished by investors.
At some point, buyers of sovereign debt worry they won't get paid back. To compensate for that risk, they demand higher interest rates. That slows economic growth, creating an incentive to keep debt levels reasonable.
The United States doesn't suffer from that problem. Other countries, such as China, are willing to buy Treasury notes. They receive hundreds of billions of U.S. dollars in exchange for exports. They must invest those dollars somewhere, and U.S. Treasurys are safe. Their high demand for Treasurys keeps interest rates low. As a result, Congress isn't burdened by punitive interest on the debt payments.
You Should Be Concerned
A budget deficit is not an immediate crisis. In moderation, it increases economic growth. It puts money in the pockets of businesses and families. Their spending creates a stronger economy. That makes other countries happy to lend to the U.S. government. It has always paid the debt back.
The World Bank found that if the debt-to-GDP ratio exceeds this tipping point for an extended period of time, it slows the economy. Every percentage point of debt above this level costs the country 1.7% in economic growth.
When the debt is excessive, owners of the debt become concerned. They worry that the United States won't pay them back. They had reason to be concerned in 2011 and 2013. That's when tea party Republican congressmen threatened to default on the U.S. debt.
You should also be concerned when the economy is doing well. The government should be reducing the deficit in an effort to lower the debt. Deficit spending in a healthy economy will make it overheat. An economy that's churning too fast creates a boom and bust cycle. It always leads to a recession.
Compare to Past Budgets
The Bottom Line
A budget deficit occurs when the country’s expenditures exceed its income within a specified fiscal year. The U.S. federal budget deficit passed the $1 trillion mark in FY 2019.
An accrual of deficits forms the national or sovereign debt.
The enormous deficits acquired these past several years stem from these three factors:
- Massive military and defense spending, kicked off by the War on Terror.
- Tax cuts, implemented during the terms of Presidents Bush, Obama, and Trump. These significantly reduced government income.
- Unfunded elements of mandatory spending. This includes Medicaid.
Deficits are incurred on purpose when the government wants its spending to spur economic growth.
The United States enjoys a very high level of trust from its investors. This is why many in government aren’t worried about balancing the budget or reducing sovereign debt.
But budget deficits should be reduced to diminish national debt, especially in times of healthy economic growth. In this scenario, deficit spending can cause too rapid growth, creating a boom and bust cycle that often leads to recession.
WhiteHouse.gov. “A Budget for America's Future, Fiscal Year 2021,” Accessed Nov. 20, 2019.
Stockholm International Peace Research Institute. "World Military Expenditure Grows to $1.8 Trillion in 2018," Accessed Dec. 24 ,2019.
The National Bureau of Economic Research. “Dynamic Scoring: A Back-of-the-Envelope Guide,” Accessed Nov. 20, 2019.
Congressional Research Service. “The Bush Tax Cuts and the Economy,” Accessed Nov. 20, 2019.
KFF. “A Primer on Medicare: Key Facts About the Medicare Program and the People It Covers,” Accessed Nov. 20, 2019.