Deficits and Surpluses
A government incurs a budget deficit when it spends more than it receives. For example, if a government spends $3,900 billion and it receives $3,300 billion from tax revenue and other sources, it incurs a deficit of $600 billion.
A government runs a budget surplus when it receives more than it spends. For example, if a government spends $3,700 billion and receives $3,800 billion in revenue, it runs a surplus of $100 billion.
For up-to-date statistics on recent United States deficits and surpluses, please click HERE, and then click on the link for the budget figures.
A budget deficit is often confused with a nation’s national debt. A deficit (or surplus) is a yearly figure, whereas a debt represents the accumulation of all past deficits (and surpluses). Debt trends are covered in Sections 2 and 3 of this unit.
For a video explanation of deficit and debt calculations, please visit:
The Clinton Surpluses
Since the 1930s, budget deficits have occurred much more frequently than budget surpluses. After World War II, only in 1969 and during the latter years (1998 through 2000) of the Clinton administration did the United States experience budget surpluses. Deficits turn into surpluses when either government spending decreases or government revenue increases, or both happen. During the Clinton administration, federal government spending continued to increase. However, tax revenue increased even more, primarily due to strong economic growth. Economic growth results in higher incomes and more jobs. This increases the tax base (more people earning more income). Strong economic growth in the 1980s, 1990s, and recently (until the sub-prime mortgage crisis in the United States) in industrialized countries has been due in great part due to the following:
1. Moderate Increases in Prices of Good and Services
From the early 1980s through the first quarter of 2008, most industrialized countries experienced moderate price increases for goods and services. Low goods and services inflation allows long-term interest rates to remain low. Low interest rates stimulate business investments as well as consumer purchases of durable goods.
Note that central banks around the world did increase their nations’ money supply more than they should have, but this was mostly reflected in increasing asset prices (stocks, housing). These wealth gains stimulated the economy. However, the significant asset price increases also led to the bubble that burst in 2008 and eventually caused record deficits.
2. Capitalism and advancing technology.
An economic system that encourages and rewards innovation and technology advances of small and large businesses, entrepreneurs, intrapreneurs, universities, and other research oriented organizations contributes to economic growth.
The Recent Record Deficits
For a brief period of time, around the time of the September 11, 2001, events, the economies of the industrialized countries around the world stagnated. This economic slowdown decreased government tax revenue in most countries. Furthermore, spending increased on defense, homeland security, and domestic programs, such as Social Security and health assistance. The decreases in revenues and increases in government spending led to significant deficits during the past decade. In the United States, increased government spending, primarily due to increased spending on several wars, homeland security, Social Security, Medicare, and Medicaid, bailout funds and stimulus packages have contributed to significant deficits. In 2016, the United States is expected to incur a deficit of close to $600 billion. This is better than the deficits of the years immediately following the 2008/2009 recession, but it is historically still very high.
Budget Deficits and Surpluses as a Percentage of Gross Domestic Product
Below is a table with data on United States budget deficits and surpluses in billions of dollars from 1980 through 2016. Deficits are expected to be a serious problem in the future as net interest payments on the debt will rise with growing deficits. Spending on defense and homeland security will remain high. An additional problem is that as more and more baby-boomers (the first ones retired in 2008) elect to draw from Social Security and sign up for Medicare (or similar programs in other countries), they will further burden nations’ national debts. The Obama administration expanded health care coverage for many uninsured. This also added significant expenses to our government’s budget. The Trump administration plans to reverse some of this spending; however, noticeable changes in this area are not likely to take place for several years.
|Year||Deficits (numbers with a minus sign) and Surpluses (numbers without a minus sign) in Billions of Dollars|
Source: Office of Management and Budget. (http://www.whitehouse.gov/omb/budget/Historicals).