Deficit? What’s a Deficit?

The Merriam-Webster dictionary defines “deficit” to mean “a deficiency in amount or quality.” When it comes to the federal budget “deficit,” it’s specifically about the amount of money in the U.S. Treasury.

Each year, money comes into the Treasury as revenues from such things as individual and corporate income taxes, payroll taxes for Social Security and Medicare, estate taxes, gift taxes, customs tariffs on imported goods, and excise taxes. The government then spends money on a vast array of federal programs — education, housing assistance, job training, the military, healthcare, and entitlement programs like Social Security and unemployment benefits. When revenues (money coming in) are higher than expenditures (money going out), you have a surplus. Much more frequently, when expenditures exceed revenues, you have a deficit.

A quick word about “the federal deficit” and “the national debt.” The deficit refers to the amount that expenditures exceed revenues in a particular year. For example, the Treasury just announced that the federal deficit for Fiscal Year (FY) 2010 – which ended on September 30, 2010 – was almost $1.3 trillion. “Debt” refers to the cumulative value of each year’s federal deficit or surplus. Today, the National Debt is approaching $14 trillion. 

So, what happens when you have a deficit? How does the federal government pay for everything when it doesn’t have enough money? The government has basically three choices – it can cut spending, it can increase revenues (mainly by raising taxes), or, most often, it can borrow.

Individuals can borrow in a number of ways, from banks or other lenders, or through the use of a credit card. But where does the government go to borrow money?

The federal government borrows money mainly from two sources. First, money can be borrowed from existing federal trust funds. For example, the government can borrow from the Social Security surplus to pay for other programs. Second, money can be borrowed from outside sources. To do this, the government issues bonds and federal securities which are purchased by individual and corporate investors, and frequently, by foreign governments. There are a number of experts who feel we need to pay greater attention to the differences between these two types of debt.

Right now there’s a lot of discussion about deficits and debt in Washington, D.C. In fact, the President’s National Commission on Fiscal Responsibility and Reform is scheduled to release its recommendations on ways to address the national debt on December 1, 2010.

Are federal deficits always a bad thing? It depends on who you ask. Deficits add to the debt, and like you, the government pays interest on money it borrows. Generally speaking, the higher the national debt, the higher the government’s annual interest payments. For example, the White House’s Office of Management and Budget (OMB) estimates that the government will pay $250 billion in interest payments in FY 2011. This amount is projected to grow to over $900 billion by FY 2010. Over that time, the government will make $3.5 trillion in additional interest payments above what they would be if interest on the debt stayed at FY 2011 levels. Dollars spent on interest payments are dollars that are not available for other federal priorities.

Yet, borrowing money allows you to continue to fund critical federal programs during times when revenues are down, rather than eliminate essential services or shut down in the short-term popular programs which it would be costly to re-start during better economic times. Likewise, borrowing can also be used to fund programs intended to aid economic recovery, as during the FDR administration or the recent American Recovery and Reinvestment Act. Borrowing is also frequently used to fund federal relief programs after a natural disaster, or in times of war.

So, at the same time that many people believe that more government spending is essential — to pay unemployment benefits, continue essential services, and promote economic recovery — others are concerned about high deficits and the long-term impact of the national debt.

NPP urges you to engage in the national conversation on debt and deficits at a time when all voices are needed. For additional information, visit NPP’s “Federal Budget 101” website at: