LegiStorm

Summary:

The federal government incurs a budget deficit (also known as a net deficit) when its total outgoing payments (outlays) exceed the total money it collects (revenues). If instead federal revenues are greater than outlays, then the federal government generates a surplus. Deficits are measured over the course of a defined period of time—in the case of the federal government, a fiscal year. Debt measurements may be taken at any point in time and represent the accumulation of all previous government borrowing activity, from private citizens, institutions, foreign governments, and other parts of the federal government. Federal debt increases when there are net budget deficits and outflows made for federal credit programs, which combine to represent debt held by the public. Federal debt also rises through increases in intragovernmental debt, which is generated by trust fund surpluses that are used to finance other government activity. Federal budgeting practices create a system where deficits and debt are interdependent: budget deficits increase federal debt levels, which in turn increase future net deficits. The nature of the relationship between deficits and debt varies depending on the type of debt considered. Budget deficits are the principal contributor to debt held by the public. The contribution of deficits to intragovernmental debt is less certain than their contribution to debt held by the public. All else equal, increases in net trust fund deficits will lead to increases in total budget deficits but decreases in intragovernmental debt. The interest payments made on publicly held debt instruments contribute directly to federal deficits. Holders of federal debt are compensated by receiving interest payments from Treasury. Intragovernmental debt does not contribute to future deficits. The combination of persistent budget deficits and a large and increasing federal debt has generated discussions over the long-term sustainability of current budget projections. Federal budget deficits have declined from 9.8% of gross domestic product (GDP) in FY2009 to 3.5% of GDP in FY2017. However, recent estimates forecast that the government will run deficits in every year through FY2027. Federal debt totaled $20.245 trillion at the end of FY2017, which as a percentage of GDP (105.9%) was its highest value since the end of World War II. There was $14.673 trillion (or 76.7% of GDP) in debt held by the public at the end of FY2017. Over time, persistent budget deficits can hamper economic growth. Deficits represent an intertemporal transfer from later generations to the current one, as money borrowed now will eventually require repayment with interest. Federal debt, either publicly held or intragovernmental, is funded through private capital. In the absence of federal debt, a portion of such funding would likely have been used on private investment projects that could increase the future productive capabilities of the economy. Large or rapidly increasing debt levels could also make the economy more susceptible to a recession, although that dynamic has not manifested itself in the United States. Federal debt is constrained by the willingness of investors to finance borrowing. While the amount of federal borrowing investors will finance may be affected by economic growth and other factors, real federal debt cannot increase indefinitely. There are no signs that such “fiscal space” will be exhausted in the short term. However, the consequences of exhausted fiscal space may be worth considering when examining the medium- and long-term trajectory of the federal budget.