What Exactly Is a Fiscal Deficit?
Governments have fiscal deficits when their income falls short of their spending. Fiscally deficit governments spend over their means.
A fiscal deficit is a percentage of GDP or spending exceeding revenue. In any scenario, income comprises solely taxes and other receipts, not borrowed money to make up the difference.
Fiscal deficits differ from debt. This is the debt from years of deficit spending. This differs from fiscal imbalance, which measures the gap between future debt commitments and revenue streams.
Understanding Fiscal Deficit
A budgetary imbalance is not always bad. John Maynard Keynes, an eminent economist, believed that deficit spending and resulting debts may aid governments in recovering from economic distress.
Fiscal conservatives promote balanced budget policies and oppose deficits.
U.S. budgetary imbalances have persisted since independence. The first Secretary of the Treasury, Alexander Hamilton, advocated issuing bonds to pay off state Revolutionary War obligations.
Record Budget Gaps
During the Depression, President Franklin D. Roosevelt introduced the first U.S. Savings Bonds to promote savings and fund government expenditures.
Roosevelt had the fastest-growing U.S. budget deficits. The government deficit rose from 4.5% of GDP in 1932 to 26.8% in 1943 due to New Deal programs to end the Great Depression and finance World War II.1
Under Truman, the government deficit was lowered, and the surplus reached $4 billion by 1947.
The U.S. budget deficit for 2020 was $3.1 trillion, three times the 2019 deficit.
President Obama raised the deficit to over $1 trillion in 2009 to fund stimulus initiatives to battle the Great Recession. That was a record monetary sum, but just 9.7% of GDP, significantly below 1940s levels.
Tax cuts and increased expenditure during the COVID-19 epidemic and economic downturn drove the 2020 deficit to $3.1 trillion under President Donald Trump.
Rare Fiscal Surpluses
The U.S. government has had a fiscal deficit in most years since WWII.
Following Truman’s 1947 surplus, there were two more in 1948 and 1951. After many years of minor deficits, President Dwight Eisenhower’s administration had tiny surpluses in 1956, 1957, and 1960. Nixon only had one in 1969.
The following government surplus was $70 billion in 1998 when President Bill Clinton achieved a historic budget deal with Congress. The surplus reached $236 billion in 2000. George W. Bush received a $128 billion Clinton surplus carryover in 2001.
Conclusion
- Spending more than taxes and other income (excluding debt) causes a fiscal deficit.
- Government borrowing bridges income-spending gaps.
- Most years since WWII, the U.S. has experienced a deficit.
