What to Know About Budget Deficits

by on June 1, 2012

Budget deficits are evil right?  At least that’s the common opinion, which I mostly agree with.  However, I read an article today that says that makes an economic argument against that stance (I’ll provide details below).

The first thing you should know is what a budget deficit is.  Quite simply, it’s when the government spends more money than it takes in.  Each year, the budget deficit is added to the national debt.  If there ever would be a surplus (the government takes in more than it spends), it would work toward reducing the national debt.  However, the national debt also grows because of the cost of interest.  The money that is paid out to holders of US Treasury Securities is the cost of the national debt.  While national debt in itself is not a bad thing (you can think of it like a mortgage on your home) if you have the means to some day pay it off, it is a bad thing when deficits continue to grow and the national debt balloons out of control.  High debt can lead to inflation, loss of confidence, devaluation of the US dollar, and ultimately much higher tax rates.

Personally, I think the problem with budget deficits is that they continue to grow each year.  Imagine if you lived your life like the government – each year spending more money than you earned.  Ultimately, it would end in bankruptcy.  The same thing could happen for the US government if the trend continues.  The problem is that current governmental leaders don’t want to upset the economy by reducing budget deficits, especially when the economy is treading water with a long term housing slump, high unemployment, and a less than vibrant economy.

budget deficits and national debtAt the time I write this, the US budget deficit is expected to be $1.5 trillion.  That is in one year!  It will add that much to the national debt level, which is about $15.8 trillion.  That means that in the last year, the budget deficit increased the national debt by 10%!  The last few years have been the biggest deficits in history.  That’s because tax rates have been kept low and government stimulus spending and spending overall has risen the fastest in history.  Politicians feel that the economy is too fragile to either raise taxes or cut spending.  However, during the really good years in the 1990s when the dot com bubble sent billions of dollars in tax revenue to the government and nearly eliminated the deficit for one year, the government still failed to make any adjustments to tax rates and spending that would help the debt issue.  And in my opinion, this is a cycle that will continue during the next period of prosperity.

Anyway, that’s my summary of the budget deficit and national debt.  We currently have over $50,000 in debt per citizen, a burden that is only getting worse each year.  I would prefer to pay my share now rather than let it build, but that’s just me.  How do others’ feel about the budget deficit?

I read an article this morning about someone that was making a case that budget deficits are a good thing, at least in the short term.  Of course the article is by a Democrat politician / professor, but it’s always nice to get an opposing point of view.  Here is what she had to say about budget deficits:

Is a decrease in the federal budget deficit good or bad for jobs and growth in the American economy? This deceptively simple question confuses thousands of students who enroll in introductory economics every year, and it will undoubtedly confuse millions of voters this year.

Based on misleading political rhetoric — a naïve assumption that government budgets are like individual or family budgets (and poorly taught economics courses) — most voters believe that a large government deficit is necessarily bad for the economy.

Following this logic, the large spending cuts and tax increases scheduled to occur in January 2013 should be good for the economy because they would sharply reduce the deficit.

But the Congressional Budget Office has just issued a sober warning that these measures, which would reduce the fiscal deficit by about 5 percent of gross domestic product between 2012 and 2013, are likely to throw the economy back into recession….

The rest of this article can be found at Today’s Economist: Laura D’Andrea Tyson: Confusion About the Deficit.

Personally, I think both sides of the government need to make some concessions.  I’m not for raising taxes, but right now they seem a little bit lower than they should be.  Also, the government really needs to stop spending more money.  Each year, they have built in increases in their budget.  Something referred to as baseline budgeting.  Until they can at least stop increasing spending so much each year, things are only going to get worse.

That’s our opinion on the federal budget deficit.  Feel free to share your opinion on this topic below.

{ 4 comments… read them below or add one }

Erick Bunchanan June 3, 2012 at 10:50 pm

I agree, I’m not into raising taxes, though I know that would be of help to the government. But, despite the fact that they spend too much of what is needed, they should learn to cut down a bit on expenses. And yes, I would prefer paying my debts now than making it worst.
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Naeem March 3, 2013 at 10:36 pm

Nice article to read.
Budget deficit is good if the money is used in capital expenditure to develop infrastructure. Because later that will generate more benefit and will help to increase the GDP.
I am from a developing country. It is quite normal for a developing country to have budget deficit as it needs to invest a lot in developing infrastructure. As it has a 5-7% growth one day it will be able to pay all the debt. At least I hope so.

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Lee March 7, 2013 at 3:30 am

Hi
Budget deficits unfortunately are a mainstay in our economy and it is only now when the world is in financial strife that suddenly governments have decided to try to get their spending under control but this only hurts the economy more as it is trying to recover. So we are in a bit of a catch 22 situation at the moment the need for spending control is critical but so is the recovery of the economy. Glad I am not a politician.

Lee
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Greg Holbert March 15, 2013 at 10:15 am

Hello Chris!

Great article that really shows people about budget deficits. I am against raising taxes because the congressmen and even the president and his cabinet make extremely high salaries. If there were budget cuts in the payroll, I think that would be a great start to give our leaders an incentive to actually BALANCE our budget and get us back on track economically. Why should we have to suffer when they face no reciprocation to their inadequacies? The politicians have dug their own grave and the people suffer because of bad spending…

Keep up the great posts that get people thinking about the financial world around them!
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