How the US Budget Deficit’s Economic Implications Could Trickle Down to You
The United States has a huge budget deficit — more than $828 billion so far in fiscal year 2024. Numbers this large are difficult to comprehend, so you may be wondering just what this means for you.
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Here’s what you need to know.
What Is a Budget Deficit?
A budget deficit occurs when a person or entity spends more money than it takes in. Suppose you earn $5,000 per month, and your monthly bills and expenses are $4,800 per month. You have a budget surplus of $200 per month. One month, you decide to go on vacation, and you spend $1,000 on your flight and hotel. For that month, you have a budget deficit of $800, because you spent $800 more than you took in.
In this individual example, you probably put that $1,000 vacation on a credit card, which you then paid off over the following months with your monthly surplus.
A national budget deficit works the same way, just on a much larger scale.
The National Budget Deficit
When the country spends more than it takes in during a fiscal year, it has a deficit. When it takes in more than it spends, it has a surplus. When it spends the same amount as it takes it, the budget is balanced.
The U.S. government runs at a deficit more often than not. In the past 50 years, the country has had a surplus just five times, most recently in 2001. In FY 2023, the government took in $4.44 trillion and spend $6.13 trillion, resulting in a deficit of $1.70 trillion.
The Difference Between the National Deficit and the National Debt
The terms ‘national deficit’ and ‘national debt’ are often confused, but they are two different things. The deficit refers to the difference between revenues and expense in a given year. When there is a deficit, the government has to raise money – above and beyond the revenue it receives from things like taxes – in order to pay for those expenses.
To raise this money, the government sells Treasury bills, bonds, and other securities. When individuals and institutions buy these securities, they are essentially lending money to the government, which will be paid back at a future date, when the securities mature. This borrowed money is added to the national debt.
Put another way, the money spent in a given year that exceeds revenues is the deficit; the money borrowed to pay that excess is the debt. The debt increases each year that there is a deficit.
How the Deficit Affects Consumers
The deficit itself does not impact consumers direct, but efforts to reduce it can. The government can attempt to reduce the deficit in three ways: by reducing borrowing costs, reducing spending, or increasing revenues.
Right now, interest rates are relatively high, which is keeping inflation in check. Lowering interest rates could ease the deficit as it would make borrowing cheaper, but that would likely raise inflation again.
Cutting government spending would also decrease the deficit. While some politicians believe this is the answer, many voters don’t want to see spending cuts, especially for social safety net programs.
The third way to decrease the deficit would be to increase taxes, so the government takes in more money from taxpayers. There is widespread support for increasing taxes for higher income taxpayers, but it remains to be seen if this will happen.
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Individual consumers have little impact on the budget deficit, but you can weather most storms by keeping your personal budget in good shape, which means watching your spending and keeping debt to a minimum.
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This article originally appeared on GOBankingRates.com: How the US Budget Deficit’s Economic Implications Could Trickle Down to You
