Budget Deficit vs. National Debt
Every year, the president creates/submits the federal budget and every year it must be approved by congress. The
federal budget illustrates all the money the government takes in as tax revenue and all the money that goes out in terms
of government spending. It is very complex and has an extremely large scale (trillions of dollars).
Budget Deficit – government spends more than it takes in as tax revenue in a given year. It forces the government to
have to borrow money to finance the deficit. In the United States this borrowing actually occurs through the Federal
Reserve issuing bonds (selling bonds) on behalf of the US government. If done on too large of a scale, it can actually lead
to hyperinflation.
Crowding Out Effect – don’t forget, when the government engages in deficit spending it creates a crowding out effect
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Increase in deficit spending by the government
Increases the interest rate
Decreases investment spending (Business spending)
Balanced Budget – government spends exactly how much it takes in as tax revenue in a given year. If the government
forced a balance budget every year there would be no debt. It would also limit the ability of automatic stabilizers to
serve their purpose. The government would not be able to run a deficit when times are bad to fund an increase in
transfer payments like unemployment compensation, welfare etc.
Budget Surplus – government spends less than it takes in as tax revenue in a given year. Very rare in modern times.
National Debt – the accumulation of past and current budget deficits and surpluses plus whatever interest has accrued
on the debt. When people/businesses/governments lend the United States government money through buying bonds
(government securities), the sum of all this money is what makes up our national debt.