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.
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.
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.
- Payroll taxes must be raised
- Benefits must be lowered
- 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.
Second, the interest due on the Treasury bonds, notes, and bills and other government borrowing adds to the deficit each year. About 5% of the budget goes toward debt interest payments. Interest on the debt hit a record in FY 2011, reaching $454 billion. That beat its previous record of $451 billion in FY 2008, despite lower interest rates. By the FY 2013 budget, the interest payment dropped to $248 billion, as interest rates fell to a 200-year low.
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 the 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 $6 trillion debt in 2000.
How do Government Finances Work 