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What is a Fiscal Deficit?
A fiscal deficit arises when a government’s total spending surpasses its income from taxes and other revenues, excluding loans. It indicates that the government is operating beyond its financial means.
A fiscal deficit is typically measured as a percentage of Gross Domestic Product (GDP) or in absolute monetary terms. The income figures used in calculating fiscal deficit exclude borrowed funds.
Fiscal deficit differs from fiscal debt, the cumulative sum of annual deficits. Moreover, it also varies from fiscal imbalance, a projection of future commitments against expected revenues.
Key Points to Remember
- A fiscal deficit occurs when a government’s spending outweighs its income from non-borrowed revenues.
- The shortfall is often mitigated through government borrowing.
- Since World War II, the U.S. has frequently experienced fiscal deficits.
Understanding the Fiscal Deficit
Contrary to popular belief, a fiscal deficit is not always considered detrimental. Revolutionary economist John Maynard Keynes advocated that deficit spending could help economies recover from recessions.
Fiscal conservatives mostly support the idea of balanced budgets to avoid accumulating debt.
Historically, since its independence, the United States has regularly encountered fiscal deficits. Notably, Alexander Hamilton, the first U.S. Secretary of the Treasury, spearheaded issuing bonds to tackle state debts incurred during the Revolutionary War.
Historical Instances of Fiscal Deficits
During the Great Depression, President Franklin D. Roosevelt introduced U.S. Savings Bonds, both to encourage savings and finance necessary government spending to mitigate the crisis.
Under the New Deal policies and amid World War II, fiscal deficits jumped from 4.5% of GDP in 1932 to an enormous 26.8% by 1943.
In later years, notable fiscal deficits include:
- The $3.1 trillion deficit in 2020 during President Donald Trump’s administration, driven by tax cuts and heightened spending because of the COVID-19 pandemic.
- The over $1 trillion deficit under President Barack Obama in 2009, which funded stimulus packages to navigate the Great Recession.
Notable Instances of Fiscal Surpluses
Although fiscal deficits have been a recurring feature, there have been periods of fiscal surplus:
- The post-WWII era, particularly under President Harry S. Truman, achieving a $4 billion surplus by 1947.
- The economic policies of President Bill Clinton in the late 1990s, realizing a landmark $70 billion surplus in 1998, growing to $236 billion by 2000.
A shift back to deficits began under President George W. Bush, despite inheriting a $128 billion surplus in 2001 from the Clinton administration.
Related Terms: fiscal surplus, balanced budget, public debt, national debt, economic recession.
References
- TreasuryDirect. “Historical Debt Outstanding - Annual 1900 - 1949”.
- Office of Management and Budget. “Historical Tables”, Download Table 1.1 - Summary of Receipts, Outlays, and Surpluses or Deficits: 1789-2021.
- Congressional Budget Office. Monthly Budget Review. “Summary for Fiscal Year 2020”.
- Congressional Budget Office. “Federal Budget Deficit Totals $1.4 Trillion in Fiscal Year 2009”.
- Congressional Budget Office. “Budget and Economic Data”. Jan. 25, 2021.
