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By the end of this section, you will be able to:

  • Explain the U.S. federal budget in terms of annual debt and accumulated debt
  • Understand how economic growth or decline can influence a budget surplus or budget deficit

Having discussed the revenue    (taxes) and expense (spending) side of the budget, we now turn to the annual budget deficit or surplus, which is the difference between the tax revenue collected and spending over a fiscal year, which starts October 1 and ends September 30 of the next year.

[link] shows the pattern of annual federal budget deficits and surpluses, back to 1930, as a share of GDP. When the line is above the horizontal axis, the budget is in surplus; when the line is below the horizontal axis, a budget deficit occurred. Clearly, the biggest deficits as a share of GDP during this time were incurred to finance World War II. Deficits were also large during the 1930s, the 1980s, the early 1990s, and most recently during the recession of 2008–2009.

Pattern of federal budget deficits and surpluses, 1929–2014

The graph shows that federal deficit (as a percentage of GDP) skyrocketed between the late 1930s and mid-1940s. In 2009, it was around –10%. In 2014, the federal deficit was close to –3%.
The federal government has run budget deficits for decades. The budget was briefly in surplus in the late 1990s, before heading into deficit again in the first decade of the 2000s—and especially deep deficits in the recession of 2008–2009. (Source: Federal Reserve Bank of St. Louis (FRED). http://research.stlouisfed.org/fred2/series/FYFSGDA188S)

Debt/gdp ratio

Another useful way to view the budget deficit is through the prism of accumulated debt rather than annual deficits. The national debt    refers to the total amount that the government has borrowed over time; in contrast, the budget deficit refers to how much has been borrowed in one particular year. [link] shows the ratio of debt/GDP since 1940. Until the 1970s, the debt/GDP ratio revealed a fairly clear pattern of federal borrowing. The government ran up large deficits and raised the debt/GDP ratio in World War II, but from the 1950s to the 1970s the government ran either surpluses or relatively small deficits, and so the debt/GDP ratio drifted down. Large deficits in the 1980s and early 1990s caused the ratio to rise sharply. When budget surpluses arrived from 1998 to 2001, the debt/GDP ratio declined substantially. The budget deficits starting in 2002 then tugged the debt/GDP ratio higher—with a big jump when the recession took hold in 2008–2009.

Federal debt as a percentage of gdp, 1942–2014

The graph shows that federal debt (as a percentage of GDP) was highest in the late 1940s before steadily declining down beneath 30% in the mid-1970s. Another increase took place during the recession in 2009 where it rose to over 60% and has been rising steadily since.
Federal debt is the sum of annual budget deficits and surpluses. Annual deficits do not always mean that the debt/GDP ratio is rising. During the 1960s and 1970s, the government often ran small deficits, but since the debt was growing more slowly than the economy, the debt/GDP ratio was declining over this time. In the 2008–2009 recession, the debt/GDP ratio rose sharply. (Source: Economic Report of the President, Table B-20, http://www.gpo.gov/fdsys/pkg/ERP-2015/content-detail.html)

The next Clear it Up feature discusses how the government handles the national debt.

What is the national debt?

One year’s federal budget deficit causes the federal government to sell Treasury bonds to make up the difference between spending programs and tax revenues. The dollar value of all the outstanding Treasury bonds on which the federal government owes money is equal to the national debt.

Questions & Answers

what is monopoly
Peter Reply
what is taxation
Peter
why do monopoly make excess profit in both long run and short run
Adeola Reply
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Kennedy
how to identify a perfect market graph
Adeola Reply
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Phindu Reply
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Charles Reply
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Charles
macroeconomics,microeconomics,positive economics and negative economics
Gladys
what are the factors of production
Gladys
process of production
Mutia
Basically factors of production are four (4) namely: 1. Entrepreneur 2. Capital 3. Labour and; 4. Land but there has been a new argument to include an addition one to the the numbers to 5 which is "Technology"
Elisha
what is land as a factor of production
Gladys
what is Economic
Abu
economics is how individuals bussiness and governments make the best decisions to get what they want and how these choices interact in the market
Nandisha
Economics as a social science, which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.
Yhaar
Economics is a science which study human behaviour as a relationship between ends and scarce means
John
Economics is a social sciences which studies human behavior as a relationship between ends and scarce mean, which have alternative uses.....
Pintu
how will a country's population be equal to it's labour force
Hope Reply
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Production Possibility Frontier
Igbekele
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Governor Reply
economic
Nwosu
Economics is the social science that deals with the unlimited human wants in the face of scarce (limited in supply) resources.
Azka
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Gift Reply
marker is the interaction of buying and selling
David
market refers to the interaction of the processes of buying and selling of commodities between the buyer and the seller.
stephen
market is a place where two parties gather to facilitate exchange of goods and services.
Yhaar
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James
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Mutia
what is consumption
Raj
Using revenue
Prince
What is stock market
Prince
What are the marmet function
Odirile Reply
price elasticity of demand is the degree of responsiveness of a quantity demanded to the change in price of the commodity in question.
Gladys Reply
What does elasticity mean
Prince
Elasticity means change in demand with the change in price. It is elastic if the demand changes with the price change whereas it is inelastic if the demand is not affected due to change in price
Devesh
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Thelma Reply
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Gladys
it helps firm to produce products that will bring more profit
Gladys
the difference between needs and wants
londiwe Reply
needs are things that we basically can't live without wants are just luxury things
Thelma
needs are things without them we can't live but want are things without we can live
KP
what is education
KP
it's a process in which we give or receiving methodical instructions
Thelma
what is mixed economy
Amex
what is a deadweight loss? how monopoly creates a deadweight loss?
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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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