Current U.S. Federal Budget Deficit

Four Reasons the U.S. Deficit Is Out of Control

© The Balance 2018

The U.S. federal budget deficit for fiscal year 2019 is $985 billion. FY 2019 covers October 1, 2018 through September 30, 2019. The deficit occurs because the U.S. government spending of $4.407 trillion is higher than its revenue of $3.422 trillion.

The deficit is 18 percent greater than last year. The FY 2018 budget created a $833 billion deficit. Spending of $4.173 was greater than the estimated $3.340 revenue.

Three Reasons for the Current Budget Deficit

Most people blame the deficits on entitlement programs. But that's only half the story. These enormous deficits are the result of three factors.

First, the attacks on 9/11 led to the War on Terror. That almost doubled annual military spending. It rose from $437.4 billion in 2003 to a peak of $855.1 billion in 2011. That includes the defense department budget and off-budget emergency spending. It also includes spending for departments that support defense, such as Homeland Security, the Department of Veterans Affairs, and the National Nuclear Security Administration.

The Trump administration will set new records of defense spending. It is estimated to reach $874.4 billion in FY 2018 and $886 billion in FY 2019. Trump wants the additional funding to fight ISIS. Congress also granted a two-year reprieve from sequestration for military spending. 

U.S. military spending is greater than those of the next 10 largest government expenditures combined. It's four times greater than China's military budget, and 10 times bigger than Russia's defense spending. It's difficult to reduce the budget deficit without cutting U.S. defense spending.

Second, mandatory spending has increased. That means benefit payouts for Social Security, Medicare, and other mandated programs. It's exceeded $2 trillion a year since FY 2011. These payments consume two-thirds of the revenue each year. Only an Act of Congress that amends a program's benefits can change them. That would require a majority vote in both houses and is unlikely to happen. Any reduction in benefits takes money out of the pockets of current beneficiaries. The powerful demographic of seniors would vote lawmakers out of office.

 

Third, the Trump tax cut will reduce revenue. It's reducing the personal income tax rate, corporate taxes, and small business taxes. These cuts total $1.5 trillion over the next 10 years. But the  said the cuts will stimulate growth by 0.7 percent annually. The increased growth will add revenue, offsetting some of the tax cuts. As a result, the deficit will increase $1 trillion over the next decade. 

Why the Government Always Overspends

The difference between the U.S. government and you is that the president and Congress overspend on purpose. Politician realize that, the more the government spends, the more it stimulates the economy. That's because government spending is itself a component of gross domestic product. They are rewarded by voters for creating jobs and growing the economy. They lose elections for raising taxes and unemployment.

Most governments that consistently increase deficits are punished by investors. At some point,buyers of sovereign debt worry they won't get paid back. To compensate for that risk, the demand higher interest rates. That slows economic growth, creating an incentive to keep debt levels reasonable.

The United States doesn't suffer from that problem. Other countries, such as China, are willing to buy Treasury notes. They receive hundreds of billions of U.S. dollars in exchange for exports. They must invest those dollars somewhere, and U.S. Treasurys are safe. Their high demand for Treasurys keeps interest rates low. As a result, Congress isn't burdened by punitive interest on the debt payments.

You Should Be Concerned

A budget deficit is not an immediate crisis. In moderation, it increases economic growth. It puts money in the pockets of businesses and families. Their spending creates a stronger economy. That makes other countries happy to lend to the U.S. government. It has always paid the debt back.

It is a concern when the debt-to-GDP ratio approaches or exceeds 100 percent. At that point, owners of the debt become concerned. They worry that the United States won't make good on its debt. They had reason to be concerned in 2011 and 2013. That's when tea party Republican congressmen threatened to default on the U.S. debt

The government reduced the deficit for the FY 2017 budget. But it has no intention of eliminating it. The Office of Management and Budget forecasts that the deficit will become a surplus by FY 2027.  Any deficit reduction necessitates painful and hotly disputed spending cuts or tax hikes. That would be the first time the budget was balanced since President Clinton's administration

You should also be concerned when the economy is doing well. The government should be reducing the deficit in an effort to lower the debt. Deficit spending in a healthy economy will make it overheat. An economy that's churning too fast creates a boom and bust cycle. It always leads to a recession

Understand the Current Federal Budget

Deficit and Budget Summaries