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Challenge #2 – Controlling U.S. Debt and Federal Budget Deficits The Federal Deficit
The federal budget deficit refers to U.S. federal government spending exceeding government income. The necessity of the $2 trillion COVID-19 stimulus contributed to a record federal budget deficit for fiscal year 2020 (year ended September). The graph below puts some historical perspective on the current deficit relative to previous years. The graph shows the U.S. federal budget surplus or deficit since 1940. The shaded areas of the graph indicate an economic recession. For fiscal year 2020 the deficit topped $3.1 trillion, more than double the $1.4 trillion deficit that resulted in 2009 from the financial crisis. Federal budget deficits didn’t really start appearing on a regular basis until the 1970s, with the deficit increasing through the first half of the 1980s. Generally, an expanding economy leads to a decrease in the U.S. federal government budget deficit as tax revenues increase. The economic expansion in the 1980s led to the deficit declining slightly in the late 1980s, and the strong economic expansion in the 1990s led to budget surpluses. Following the recession of the early 2000s and the financial and economic crisis of the late 2000s, the deficit once again was reduced. However, the tax cuts of 2018 contributed to a growing budget deficit, and the 2020 stimulus brought the deficit to record levels.
Federal Budget Surplus or Deficit Annual amount of Federal Budget Surplus or Deficit in Millions of Dollars (1/1/40-9/30/20) Source: Federal Reserve Economic Database (FRED); U.S. Office of Management and Budget
Federal Debt To finance a budget deficit the U.S. government borrows money from the public through the issuance of U.S. government debt securities called U.S. Treasury securities. Buyers include individuals, institutional investors, certain mutual funds, and foreign investors and governments. Regarding the foreign investors, Japan and China are by far and away the major foreign investors in U.S. Treasury securities. As of August 2020, Japan owned nearly $1.3 trillion of U.S. Treasury securities while China owned nearly $1.1 trillion. Japan’s holdings accounted for approximately 18% of the Treasury debt held by foreign investors while China accounted for approximately 15%. The graph below puts some historical perspective on the current deficit relative to previous years. The graph shows the total federal debt held by the public. From 2000 to 2009, the federal debt approximately doubled, from approximately $5.8 trillion to $12.3 trillion. In the past decade, the federal debt level nearly doubled again, from $12.8 trillion in 2010 to over $23.2 trillion in the further quarter of 2019. In 2020, a spike in the debt level occurred. By the end of the second quarter in 2020, debt approached $26.5 trillion, a 14% increase relative to the fourth quarter of 2019.
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Center for Business and Economic Insight
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