If you have been paying close attention to the news lately, you would know that the US came within hours, if not minutes from a government shutdown just last week. Congressional leaders were caught in a deep debate over government spending. Arguably, budget approval is an appropriate time to consider spending… well maybe not in the minutes before it needs to be approved, but a discussion, nonetheless, is always worthy and surely warranted. Just a few months back, you may recall a pitch battle in Congress over the raising of the debt ceiling. Failure to accomplish that would have possibly led to a potential default on Treasury-issued bonds. Thankfully, the debt crisis was resolved, and bonds were not defaulted on. Raising that debt ceiling was necessary in order for the Treasury to be able to sell bonds, essentially, borrow money, to pay for budget shortcoming… aka budget deficits.
The United States has a long and complex history with budget deficits. A federal deficit, also known as a budget deficit, occurs when The Government’s expenditures exceed its revenues or income over a specific period, typically a fiscal year. In essence, it represents the shortfall between what a government spends on various programs, services, and obligations and the amount of money it collects through, predominantly, taxes. To cover this deficit, governments often borrow money by issuing debt instruments such as bonds. The federal deficit is a key indicator of a government’s fiscal health and its ability to manage its finances, with sustained deficits potentially leading to increased debt burdens and long-term economic consequences, something which has become top of mind once again in the wake of the developments this year. So, I thought this might be a good opportunity to examine the history of budget deficits to help us better grasp the gravity of the deficit.
A history of the US Budget deficit
1791-1913: Early Years and Limited Deficits
The first federal budget deficit in the United States occurred shortly after the country’s founding. In 1791, during the administration of President George Washington, the federal government ran its first recorded budget deficit. This deficit was primarily a result of the costs associated with the creation of a federal government which assumed state debts. The deficit was relatively small by modern standards but marked the beginning of the country’s experience with budget deficits. To be clear, many governments AND monarchies ran budget deficits during this period, and using debt to make up for shortcomings was considered a necessity for running matters of the state smoothly.
During this period, the US government operated with minimal deficits. The federal government relied primarily on tariffs and excise taxes for revenue. The budgetary focus was on maintaining a balanced budget, with occasional deficits during wars and crises.
1914-1945: World Wars and Deficit Expansion
The outbreak of World War I marked a significant shift in the fiscal policy of the United States. The government started running substantial deficits to finance the war effort. This trend continued into World War II, leading to a significant increase in government spending and debt.
1946-1970: Post-War Boom and Balanced Budgets
Following World War II, the US experienced a post-war economic boom. With a strong economy, the government managed to balance its budget during much of this period. However, there were occasional deficits during economic downturns.
1970-1980: Modern Era of Deficits Begins
The 1970s saw a shift in fiscal policy, with deficits becoming more common. Factors such as increased government spending, rising entitlement costs, and economic recessions contributed to persistent deficits.
1980s-1990s: Fiscal Responsibility and Surpluses
The late 1990s marked a period of fiscal responsibility, resulting in budget surpluses under the Clinton administration. This era showcased the potential for reducing deficits through a combination of economic growth, reduced military spending, and tax increases.
2000s-2010s: Financial Crisis and Rising Debt
The financial crisis of 2008 had a profound impact on the budget deficit. The government implemented stimulus measures and bailout packages, leading to substantial deficits. The deficit continued to rise during the 2010s due to increased spending on healthcare, entitlement programs, and tax cuts.
2020-Present: Pandemic Response and Record Deficits
The COVID-19 pandemic triggered unprecedented government spending to support the economy and healthcare efforts. The deficit skyrocketed, reaching levels not seen since World War II. The debate over stimulus packages, infrastructure spending, and taxation remains central to the current fiscal landscape.
So, there you have it. A small deficit, managed during the post-Revolution era, a post WWII-era economic boom which shrunk the deficit, massive spending with less tax dollars to cover it, a budget surplus, a massive deficit associated with post-Global-Financial-Crisis stimulus, and finally, a massive deficit caused by pandemic-era stimulus.
As with our own personal budgets, governments must manage their budgets to ensure a healthy financial environment, which is why many are concerned about the current budget deficit, while improving, is still at unprecedented heights. What are some of the implications of a large budget deficit?
- Interest Rates: Deficits can influence interest rates, affecting borrowing costs for governments, businesses, and consumers. Countries with higher deficits and debt levels may be forced to pay more in order to borrow.
- Inflation: High deficits may contribute to already strong inflationary pressures.
- Taxation and Policy Changes: Tax policies and government spending can directly impact investment returns. In order to shrink an out-of-control budget deficit, lawmakers may be forced to raise taxes or cut government-sponsored programs.
The history of the US budget deficit reflects the nation’s economic, political, and social evolution. We have a love-hate relationship with government spending. Sure, we would like to have access to services and programs, but not unlike our own budgets, those things must ultimately be paid for. Many believe that accumulating huge debt burdens to finance deficits is the equivalent of kicking the can down the road and leaving the mess for future generations. More recently, government spending brought the US economy back on its feet in the wake of pandemic lockdowns and a flash recession. Though the Federal deficit has improved markedly in the past 18 months, it remains at untenable levels. The recent showdown between lawmakers over a spending bill has thrown the federal deficit back into sharp focus once again. Though the issue was resolved, the fix was only temporary. Ultimately, lawmakers are going to have to decide on the tradeoffs between raising taxes, cutting spending… or neither. All three will have an impact on your financial health.
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