What Is the U.S. Budget Deficit?

The U.S. budget deficit occurs when government spending exceeds annual revenues. The inverse of a deficit is a surplus, which occurs when revenues exceed expenses. A budget is “balanced” when revenues and expenses are roughly equal. 

Understanding the U.S. budget deficit

The U.S. generates a budget deficit when the government’s expenses exceed annual revenues from taxes, fees and investments. Generally, it’s measured in terms of gross domestic product (GDP), though it can also be calculated in dollars.  

National deficit vs. national debt

Many people confuse the national deficit and national budget. 

Essentially, the deficit is when expenses exceed income. To cover a deficit, the government may acquire debt by selling Treasury bonds, bills or other assets. 

Therefore, the national debt is the accumulation of debts that pay for the deficit, plus interest on those debts. When the government incurs back-to-back deficits, the national debt increases. 

What causes a budget deficit?

Several factors can contribute to the U.S. budget deficit in a given year, like:

• A slow economy that produces lower tax revenues
• Increasing military and social program spending without a corresponding increase in taxes
• Subsidizing specific industries more heavily
• Sudden events that prompt unexpected expenditures

However, one expenditure that does not contribute to the deficit is Social Security. These payments are covered by payroll taxes and a designated trust fund until 2034.

How to lower budget deficits

The government can lower the deficit by increasing revenue or decreasing expenses. But there’s more than one way to accomplish these goals. 

For instance, the government may levy higher taxes on corporations or high earners to generate immediate revenue. Alternatively, it may cut taxes or alter regulations to encourage higher employment and economic growth, leading to higher taxable profits and incomes long-term. 

The government may also slash spending by downsizing social welfare or military programs. Just where and how much to cut is often a matter of intense debate. 

What is the U.S. budget deficit?

Over the last 50 years, the U.S. has only run a surplus five times – the last in 2001. 

The largest deficit ever hit $3.13 trillion. That occurred in 2020 when the Trump Administration passed the CARES Act, among other pandemic aid. 

For fiscal year 2022, the U.S. budget deficit hit $1.375 trillion – just half of 2021’s $2.776 trillion deficit. All told, the government spent $6.27 trillion and collected $4.9 trillion in revenue – the largest one-year revenue on record. 

How does the U.S. budget deficit affect you?

Budget deficits can cause the government to borrow more, increasing the national debt. 

Worst-case, unchecked deficits can balloon the national debt faster than GDP growth, leading to economic instability.  

Inversely, if the government attempts to curtail the deficit, it may slash crucial spending on infrastructure, Medicare, the military or other programs.  

What this means for you

While they sound intimidating, some governments – the U.S. included – actually use budget deficits to expand the economy. When successful, this tactic can put more money in consumers' pockets and increase investment profits.  

That said, it’s essential for governments to use their deficit spending wisely. Providing too much stimulus in a warm economy can contribute to boom-and-bust cycles of short-term success, inflation and recession.