United States Federal Budget - Understanding Deficits and Debt

Understanding Deficits and Debt

The annual budget deficit is the difference between actual cash collections and budgeted spending (a partial measure of total spending) during a given fiscal year, which runs from October 1 to September 30. Since 1970, the U.S. federal government has run deficits for all but four years (1998–2001) contributing to a total debt of $16.1 trillion as of September 2012.

CBO's preliminary estimate of the 2012 "total budget" deficit was $1.090 trillion, down $207 billion versus 2011. The 2012 deficit was 7.0% GDP, down from 8.7% GDP in 2011. The fiscal year 2011 "total budget" deficit was $1.296 trillion or 8.7% GDP, similar to the $1.294 trillion or 9.0% GDP in 2010. These deficits are considerably higher than pre-crisis levels, which ranged from a $236 billion (2.4% GDP) surplus in 2000 to a $459 billion (3.2% GDP) deficit in 2008. However, budget rules have changed from FY2009 onward, with spending for the Iraq & Afghanistan wars and stimulus measures now included in the deficit computation. Approximately $1 trillion was added to the national debt in FY2008, considerably higher than the deficit reported in that year.

The national debt increase during a given year is not the same as the "total budget" deficit commonly reported, due to a variety of accounting complexities involved. These differences can make it more challenging to determine how much the government actually spends relative to tax revenues. The increase in the national debt during a given year is a helpful measure to determine this amount. From FY 2003-2007, the national debt increased approximately $550 billion per year on average. For the first time in FY 2008, the U.S. added $1 trillion to the national debt as the effects of a severe global financial crisis became apparent. Debt increases rose to $1.88 trillion in 2009 and $1.65 trillion in 2010 as the crisis continued. In relative terms, from 2003-2007 the government spent roughly $1.20 for each $1.00 it collected in taxes. This increased to $1.40 in FY2008 and $1.90 in FY2009.

The total federal debt is divided into "debt held by the public" and "intra-governmental debt." The debt held by the public refers to U.S. government securities or other obligations held by investors (e.g., bonds, bills and notes), while Social Security and other federal trust funds are part of the intra-governmental debt. As of September 30, 2012 the total debt was $16.1 trillion, with debt held by the public of $11.3 trillion and intragovernmental debt of $4.8 trillion. Debt held by the public as a percentage of GDP rose from 34.7% in 2000 to 40.3% in 2008 and 70.0% in 2012. U.S. GDP was approximately $15 trillion during 2011 and an estimated $15.6 trillion for 2012 based on activity during the first two quarters. This means the total debt is roughly the size of GDP. Economists debate the level of debt relative to GDP that signals a "red line" or dangerous level, or if any such level exists. By comparison, China's budget deficit was 1.6% of its $10 trillion GDP in 2010, with a debt to GDP ratio of 16%.