7 Things to Know about the Budget Deficit

Editor’s Note: Below are seven facts you really should know about debt and the budget deficit. The list comes to us from Our Fiscal Security, where this piece first appeared. 

1. The deficit is the gap between what the government spends and the revenues it collects each year. We didn’t always run deficits. When President Clinton left office, the federal budget was running a surplus of $236 billion, or about 2% of the U.S. economy. And that extra revenue was being used to pay down the national debt. To understand how we moved from big surpluses to a growing deficit, it’s helpful to examine each of the major factors driving our nation’s current deficits.

2. Every million additional jobs we generate reduces the deficit by $54 billion.

3. It’s misleading (and dangerous) to confuse the short-term budget shortfall with the medium-term deficit or the long-term debt. Here’s a way of understanding it:

  • The Short-Term Recession Shortfall (1-3 years): The Great Recession was responsible for 61 percent of the deficit last year.
  • Tax receipts fell as people lost jobs and income and businesses failed; federal tax revenues declined from 18.5% of GDP in 2007 to 14.8%.
  • Spending rose with government supports such as unemployment insurance, the Recovery Act, TARP funds, payments to Fannie Mae and Freddie Mac and discretionary outlays for defense spending, from 19.6% of GDP in 2007 to 24.7%.
  • The Medium-Term Bush Deficit (10 years):
  • We ran a $236 billion surplus before the Bush tax cuts, but we have run deficits for the past 9 years.
  • The ten-year projected deficit is entirely explained by the economic downturn, the Bush tax cuts and the wars in Afghanistan and Iraq. Bush tax cuts and the wars made up $500 billion of the 2009 deficit and will create $6 trillion in deficits and debt service over the next decade.
  • The Long-Term Health Care Costs Debt (30 years +):
  • The rapidly rising cost of private health care — doctor’s visits, prescription drugs, procedures — is the only truly unsustainable part of the long-term budget. If U.S. health care costs were growing at the rate of other wealthy countries, we would have no long-term debt problem.
  • Social Security does not significantly contribute to the long-term debt picture. Its total shortfall is projected to be 0.7% of total GDP of the next 75 years, a small effect on the budget compared to the economic downturn and the Bush-era tax cuts, which will, over the next decade, consume 1.5% and 2.6% of GDP respectively.

4. A bi-partisan taskforce has identified over $1 trillion in defense spending that could be saved over ten years to reduce the deficit without jeopardizing national security.

5. The claim that the United States faces over $63 trillion in liabilities, unfunded retirement and health care obligations is based on deceptive and misleading figures-which are based on projections of health care costs over 75 years, and assumes no changes in tax revenues or reductions in health care costs.

  • The CBO estimates that between 2012 and 2020, the debt held by the public will only rise by around 1%, far from the rapid ballooning that these claims make.

6. Most economists agree that debt held by the public — rather than gross debt — is the proper measure on which to focus because that’s what really affects the economy. Studies showing the U.S. near a debt “tipping point” of 90% of GDP make improper comparisons between the U.S and other countries. 

7. Contrary to general belief, high debt does not necessarily lead to slow growth, but rather slow growth can lead to growth in debt.

photo credit: thanks to dbking via flickr


tian y.
Past Member 7 years ago

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John S.
Past Member 8 years ago

Actually, the deficit spiked in Reagan's second year , then declined sharply in the second term of Reagan's presidency (by about 18.8% (GDP) - being about half of 36.6), a far cry from the doubling, tripling, or quadrupling that some claim. In addition. An equally if not more powerful influence for Clinton was the booming economy and huge gains in the stock markets, the so-called dot-com bubble, which brought in hundreds of millions in unanticipated tax revenue from taxes on capital gains and rising salaries. Deficits, in most conversation, refer to the annual budget deficits where our government projects to spend more than it brings in. These deficits tend to be strictly on paper. For example, while he was $5.7 trillion in debt, Clinton projected a $236 billion surplus for 2000. Bush's deficits never got to be much more than $400 billion a year, yet he increased the debt by $5 trillion. Do the math. Obama's projected deficits come in about $100 billion below the Congressional Budget Office's estimates until he leaves office, when his projected deficit comes in at about half of what the Congressional Budget Office estimates (about $700 billion in 2019 according to Obama, about $1.2 trillion according to the CBO). I guess when he leaves office he can blame the actual deficits on his predecessors.

Note that since spending (in nominal dollars) has increased faster under Bush and Clinton than Reagan, liberals are falling back to the proper measure of indebtedness (as a % GDP)

Steve F.
steve F8 years ago

The Bush era tax cuts generated so many jobs (NOT). I can't wait to see how many more jobs are generated with the extension of the these cuts for the rich (NOT)

John C.
John C.8 years ago

I Agree with you about the National Debt being the gap between what the Country brings in and what it spends.
The world has grown, yet in alot of ways it has become very small. Some how in this expanding unity of a global market and our ever bizzier lives, something may have been over looked. Money cost money, that is; in order to have cash or credit to spend, it cost us ( the consumer) money to print money or store credits electronically.I have written a petition " The National Debt" if you have time please look at it. sign it if you want, or not. I could be wrong, it wouldn't be the first time, I just can't help but to believe, when i crunch numbers this will work. It's not the whole salution but a start. "thank you"

Grace Johnson
Grace Johnson8 years ago


Charles Temm JR
Charles Temm JR8 years ago

2 years out of the last 80 odd we've had budget surpluses. The 2 years under Clinton came only because of 2 things; a) Cold war peace dividend-virtually all of the real budget cuts were in DOD and b) a divided government which was the result of the first attempt at national health care ie HillaryCare. The country rejected that attempt and most politcal watchers claim that the 2010 Dem slaughter was a repeat of that with ObamaCare's passing.

2. The private sector generates jobs, not the government. For years the government has done everything it could to stymie any such growth with increased taxes, regulations, and new government spending/programs. The Administration is in la la land by denying that basic fact.

3. The idea that tax cuts = deficits ignores the reality of SPENDING not revenue is the problem in our nation. Dividing the deficit into short/long term sectors is an attempt to compartmentalize blame, not reasoning on the whys of the problem. Wars cost money as does all the 'helping' programs you list-all are government spending. Funny how you take CBO etsimates as face value when it "shows" ObamaCare saves money while claiming that any other estimates of forecasted debt don't use all facts. That is a point that many economists/accountants make on the rosy figures of ObamaCare.

The list of feeble attempts to explain away the unfunded debt problem and comparison of national debt ratios is sad. Incomplete and hopeful but nothing new I guess....

heather g.
heather g8 years ago

I don't know enough about international finance to comment on this article. What I do know is that all over the world, the poor are becoming poorer and the wealthy people are becoming wealthier. A survey in the UK found that CEO's were given on average raises totalling 55% in the present economic climate.

Tana Williams
Tana Williams8 years ago

The fibromyalgia I have must be damaging my brain, because I have no idea if Emanuel is making a joke or if he's serious. I mean, I've actually read some stuff like this recently and from people who, just looking at their photos, seem to be relatively normal looking people. But I just can't tell here.

Lin Penrose
Lin Penrose8 years ago

Thank you Nichole. This does help clarify the confusion surrounding our current $ situation. I've seen so many numbers & finger pointing, my brain was numb. Does not increase hopes for a "rosey" future, with the Anti-America Republicans so powerful.

Donna Hardy J.
Donna Johnston8 years ago

I agree with Lynn C. So we have to share this information with our family and neighbors. Reach out to those around you - share and discuss. Start debunking the misinformation now in preparation for the 2012 election. If each of us starts now, hopefully, by the time the mud starts flying for 2012 people will look to each of us for real information - substance instead of sound bites.