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By the end of this section, you will be able to:

  • Explain the U.S. federal budget in terms of annual debt and accumulated debt
  • Understand how economic growth or decline can influence a budget surplus or budget deficit

Having discussed the revenue (taxes) and expense (spending) side of the budget, we now turn to the annual budget deficit or surplus, which is the difference between the tax revenue collected and spending over a fiscal year, which starts October 1 and ends September 30 of the next year.

[link] shows the pattern of annual federal budget deficits and surpluses, back to 1930, as a share of GDP. When the line is above the horizontal axis, the budget is in surplus; when the line is below the horizontal axis, a budget deficit occurred. Clearly, the biggest deficits as a share of GDP during this time were incurred to finance World War II. Deficits were also large during the 1930s, the 1980s, the early 1990s, and most recently during the recession of 2008–2009.

Pattern of federal budget deficits and surpluses, 1929–2014

The graph shows that federal deficit (as a percentage of GDP) skyrocketed between the late 1930s and mid-1940s. In 2009, it was around –10%. In 2014, the federal deficit was close to –3%.
The federal government has run budget deficits for decades. The budget was briefly in surplus in the late 1990s, before heading into deficit again in the first decade of the 2000s—and especially deep deficits in the recession of 2008–2009. (Source: Federal Reserve Bank of St. Louis (FRED). http://research.stlouisfed.org/fred2/series/FYFSGDA188S)

Debt/gdp ratio

Another useful way to view the budget deficit is through the prism of accumulated debt rather than annual deficits. The national debt    refers to the total amount that the government has borrowed over time; in contrast, the budget deficit refers to how much has been borrowed in one particular year. [link] shows the ratio of debt/GDP since 1940. Until the 1970s, the debt/GDP ratio revealed a fairly clear pattern of federal borrowing. The government ran up large deficits and raised the debt/GDP ratio in World War II, but from the 1950s to the 1970s the government ran either surpluses or relatively small deficits, and so the debt/GDP ratio drifted down. Large deficits in the 1980s and early 1990s caused the ratio to rise sharply. When budget surpluses arrived from 1998 to 2001, the debt/GDP ratio declined substantially. The budget deficits starting in 2002 then tugged the debt/GDP ratio higher—with a big jump when the recession took hold in 2008–2009.

Federal debt as a percentage of gdp, 1942–2014

The graph shows that federal debt (as a percentage of GDP) was highest in the late 1940s before steadily declining down beneath 30% in the mid-1970s. Another increase took place during the recession in 2009 where it rose to over 60% and has been rising steadily since.
Federal debt is the sum of annual budget deficits and surpluses. Annual deficits do not always mean that the debt/GDP ratio is rising. During the 1960s and 1970s, the government often ran small deficits, but since the debt was growing more slowly than the economy, the debt/GDP ratio was declining over this time. In the 2008–2009 recession, the debt/GDP ratio rose sharply. (Source: Economic Report of the President, Table B-20, http://www.gpo.gov/fdsys/pkg/ERP-2015/content-detail.html)

The next Clear it Up feature discusses how the government handles the national debt.

What is the national debt?

One year’s federal budget deficit causes the federal government to sell Treasury bonds to make up the difference between spending programs and tax revenues. The dollar value of all the outstanding Treasury bonds on which the federal government owes money is equal to the national debt.

Questions & Answers

What is Bank rate
Arranolla Reply
How defined macroeconomics
Arranolla Reply
Macroeconomics is the study of economy wide phenomena,including inflation,economic growth and unemployment.
munna
Someone tells you "That theory has no practical value because it is abstract, it is not real , it exist only in the mind of the theorist". Refute the Statement.
johan Reply
Truly theory sometimes look like an abstract, but some theory has been tested scientifically and we believed they exist. just like the law of demand which States that the higher the price, the lower the quantity demanded vice versa. But the rule does not hold in luxury goods.
Ganiyu
Ty for the answer sir..😘
johan
Is it right
Arranolla
explain estimation problem please.
Nnenna Reply
Which is the role of household in the Government policy?
Giada Reply
What is the role of household in the Government policy?
Giada Reply
households are very important because the consumption of the goods and services are by people. households play a big role in that
Raghava
And how about work? Can they influence the government policy through the work market?
Giada
yes household can influence government policy. you see it is all about the demand and supply of commodities. Demand generated by household has to be fulfilled by the industries which in turn ofcourse influence government policies
Rishav
Do the neoclassica theory and the Keynesian one have a different vision about the household's influence in the Government policy?
Giada
what are the causes of voluntary and involuntary unemployment?
JONATHAN Reply
involentary the unemployment is when say someone is working part-time but wishes to work full time
Warface
in most of economists view a person is involuntarily unemployed if he want to move for better wage rate at some point above the market equilibrium, that he stays right now.
Salman
what are the two type of intermediation and whats there differences?
Simonsakala Reply
This might help friend. ***economicshelp.org/blog/6318/economics/functions-and-examples-of-financial-intermediaries/
Ti
ok
Habeeph
I'm new myself. I couldn't explain it very well. That's why I gave the link.
Ti
OK tnx
Habeeph
i dont know sir pls explain anybody
Avinash
thanks...ti khu
Simonsakala
never worry
Habeeph
The are many types of intermediaries
Mohammed
You're welcome Simonsakala Musaka!
Ti
A lot of the content is verbatim what's in my College textbook except this book explains it more whereas my College Book seems to think I should already know haha
Ti
please help explain mpc
Nnenna Reply
MPC is partly the each income to expenditure..
Marusaha
s the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
Kalyango
it's simply how much of one's income spent on consumption. so if on the average people in an economy spend 65% of their income on goods and services and save 35%, the MPC for that economy is 0.65 and their MPS is 0.35. The MPS is how much of their income not spent, but saved. I hope this helps.
Georgina
Georgina explained it impeccably.
Thabiso
Consumption is defined as the usage of goods or services to satisfy human wants.
Bachabor Reply
What is Marginal Propensity to Consume (MPC)?
Bachabor
What is Marginal Propensity to Consume(MPC)?
Bachabor
MPC means that when disposable increase, personal consumer spending increases also.
Thabiso
When debit and credit entries on the balance of payments are not balanced what is it called?
Thabiso Reply
unbalanced balance sheet
Warface
Thank you very much.
Thabiso
what is consumption
Ameer
the use of goods and services by households
Sonali
What is economics?
munna Reply
Economy is a subject which deals with the economic activities of human being such as production, consumption,and distribution
Arranolla
what is demand
ddamba Reply
is the desire backed by ability to buy a certain commodity at given price in given period of time.
Kalyango
yes
Raj
yas
Ashutos
willingness is a must
Sumaya
what's macroeconomics?
munna
Macroeconomics is the study of how society as a whole (an entire country's economy) chooses to allocate and use scarce resources to produce, consume and exchange in the market
Baaba
Thanks!
munna
what is economy
Ameer
How do you distinguish leading indicators from coincident indicators to lagging indicators?
Thabiso Reply
What is externalities and environmental taxation
Ganiyu Reply
environmental taxes are kind of economics instruments to adress environmental problems.
Swapnil
What is the reason behind present increasing interest rate in Argentina? Why its currency is devaluating?
Saujanya
Due to lot of money supply
Arranolla
Due to supply of money...when money supply is raise,interest rate decreases but when it's cut or decrease ,it increases interest rate.So in Argentina,with regards to money supply,interest rate will only increase when money supply decreases which in turn with higher interest rate devalue currency.
Emmanuel

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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