Making Sense of the Federal Deficit
The federal deficit is often confused with federal debt, though the two are closely intertwined and impact the U.S. economy in several ways. A federal deficit is simply defined as the shortfall that remains when the government’s expenditures exceed its revenue.
Imagine if, at the end of this month, your bills exceed your deposits. You might dip into your savings, apply the deficit to a credit card, or borrow money from a friend, family member, or lender. Essentially, this is no different than how Congress manages the federal deficit, except at the federal level, borrowing money means selling Treasury securities to the public. These owed funds become part of the national debt.
So who decides what is spent and what is collected as revenue? Each year, the annual federal budget is established by the president, who submits a budget request each February for the upcoming fiscal year (beginning October 1) after consulting with federal agencies and the president’s Office of Management and Budget.
The federal government has consecutively reported a deficit since 2002. Last year alone the Congressional Budget Office reported a deficit of $779 billion, putting the national debt at over $21 trillion at the fiscal end of 2018. Compared to recent years, this deficit was relatively low: in 2009, Congress reported a record-setting $1.41 trillion deficit, and over a trillion dollars each year thereafter until 2013.
Deficits and national debt should really be analyzed alongside the gross domestic product (GDP), taking the true size of our economy into context. The GDP is the total value of final goods and services produced within a country, generally measured on an annual basis. If our GDP is growing at a higher rate than our national debt, there may be little cause for concern. The relationship between the two is measured by the ratio of national debt (in currency such as dollars) to the GDP. This debt-to-GDP ratio is a commonly used measure of a country’s financial health, and the lower this ratio’s percentage, the better. Countries wishing to join the European Union, for example, had to have a ratio under 60%. The U.S. Bureau of Public Debt reported a debt-to-GDP ratio of 105% in 2017, though this is still much lower than the highest reported U.S. debt ratio of 122% in 1946.
How Does the National Debt Impact Individuals?
High national debt can have several negative impacts on the economy, including the following:
Lower wages. Investing in government debt translates to money not being invested in companies, which can lead to stumped economic growth and wages.
Higher interest rates. With each new deficit, the government needs to sell more Treasury securities to finance the debt. In order to make these securities more attractive to foreign investors, banks, and the general public, the government will often increase interest rates.
Standard of living inequality for future generations. Lower wages, slower job growth, and higher interest rates all spell hardship for upcoming generations who may have to survive on less or prolong retirement dates.
Looming crises. If deficits and national debt growth go unchecked, U.S. debt investors could very well demand higher returns, ultimately leading to an unprecedented financial crisis.
Ironically, many people pay more attention to the federal budget and national debt than their own personal finances. When scrutinizing deficits and debt at an individual level, it’s important to understand that managing personal debt, coupled with a sound savings and investment plan, should be your highest priority.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.