How Does the Federal Government Finance a Budget Deficit?

The federal government finances a budget deficit by issuing debt, which is then bought by investors. The government pays interest on this debt, which adds to the deficit.

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How the Federal Government Finances a Budget Deficit

The federal government finances a budget deficit through borrowing. When the government runs a deficit, it borrows money by selling Treasury securities to the public. Treasury securities are government debt instruments issued by the U.S. Department of the Treasury. They include bills, notes, and bonds. The government uses the money it raises from the sale of Treasury securities to fund its operations.

The federal government also finances a budget deficit through inflation. When the governmentprints more money, the value of each dollar decreases, and this leads to inflation. Inflation erodes the purchasing power of taxpayers’ dollars and reduces the value of government debt.

The Federal Government’s Revenue Sources

The federal government’s revenue is generated through a number of sources, including individual and corporate income taxes, excise taxes, and tariffs. Social security and other payroll taxes make up a significant portion of the government’s revenue as well. In Fiscal Year 2015, the federal government collected $3.25 trillion in revenue.

Out of that total, $1.48 trillion came from individual income taxes, while corporate income taxes brought in $345 billion. Social security and other payroll taxes totaled $956 billion. Excise taxes brought in $87 billion, while tariffs collected $33 billion. Other revenue sources included estate and gift taxes ($23 billion), customs duties ($27 billion), and interest on the federal debt ($249 billion).

The Federal Government’s Expenditures

The U.S. federal government spends more than it takes in through revenue each year, resulting in a budget deficit. The government covers this deficit by borrowing money, which adds to the federal debt.

Federal spending pays for a variety of programs and services, including:
-National defense
-Medicare and Medicaid
-Interest on the national debt
-Social Security
-Unemployment benefits
-Food stamps
-Environmental protection

The largest category of federal spending is mandatory spending, which includes programs like Social Security and Medicare that are required by law. Discretionary spending, which includes most other programmatic spending, is set by Congress each year in the appropriations process.

The Federal Government’s Deficit

The U.S. federal government regularly runs a budget deficit, which occurs when its annual spending exceeds its annual revenue. The government then finances this deficit by borrowing money, primarily in the form of U.S. Treasury securities.

In 2018, the federal government’s budget deficit was $779 billion, or 3.9% of gross domestic product (GDP).1 This was the first time since 2013 that the federal deficit surpassed $700 billion.2

In recent years, annual federal deficits have been financed primarily through the issuance of marketable Treasury securities, such as bills, notes, and bonds.3 The majority of these securities are purchased by entities inside the United States—such as other governmental units, financial institutions, and private citizens and corporations—although a small portion is held by foreign investors as well.4

When the government issues new Treasury securities to finance its debt, it competes with other borrowers in the marketplace for investors’ money. To entice potential buyers, the government must offer interest rates that are higher than what can be obtained on alternative investments with comparable levels of risk—such as corporate bonds or certificates of deposit (CDs).5 Consequently, as the level of federal debt increases—or if investor confidence in the government’s ability to repay its obligations declines—the interest rates that the government must offer to sell its securities will also tend to rise.6

The Federal Government’s Surplus

The federal government’s surplus is the total amount of money that the government has left over after it has paid all of its expenses for the year. The surplus is used to finance the government’s debt, which is the money that the government borrows to pay for its operations. If the government has a surplus, it can use the surplus to pay down its debt. If the government has a deficit, it must borrow money to cover its expenses.

The Federal Government’s Debt

The federal government finances a budget deficit through borrowing, which results in an increase in the national debt. The government borrows money by selling bonds, which are effectively IOUs. The bonds are purchased by investors, who loan the government money in exchange for interest payments. When the government runs a budget deficit, it must borrow money to cover the shortfall. This borrowing adds to the national debt.

The Federal Government’s Interest Payments

The federal government’s budget deficit is the difference between the revenue it collects from taxes and other sources and the spending it does each year. The government finance this deficit by borrowing money, which it then has to pay back with interest. In 2018, the federal government paid $325 billion in interest on the national debt. That’s more than what it spent on programs like education, transportation, and housing combined.

Interest payments on the national debt are one of the largest expenses in the federal budget. They are also one of the fastest-growing expenses. In 2000, interest payments were just $206 billion. But they more than doubled over the next decade, reaching $455 billion by 2010. They remained high even after the Great Recession ended in 2009, peaking at $473 billion in 2013. Since then, they have declined slightly but are still among the largest expenses in the federal budget.

Interest payments on the national debt cost taxpayers a lot of money every year. But they also have other effects on the economy. For example, they crowd out other important spending priorities like education and infrastructure. And they make it difficult for the government to reduce the deficit without making deep cuts to spending or raising taxes.

The Federal Government’s Social Security Trust Fund

The federal government finances a budget deficit by borrowing money from the public, most commonly through the sale of Treasury securities. The federal government also has the option of using its Social Security trust fund to finance a portion of the deficit.

The Social Security trust fund is a special account that is used to finance the Social Security program. The trust fund is made up of money that has been collected from payroll taxes and is invested in Treasury securities. The interest earned on these securities helps to finance the Social Security program.

If the Social Security trust fund is used to finance a portion of the deficit, it means that there will be less money available to pay for the benefits of current and future retirees. This could eventually lead to benefit cuts or an increase in payroll taxes.

The Federal Government’s Medicare Trust Fund

The Federal Government Medicare Trust Fund is the nation’s largest source of health insurance. In 2013, it provided coverage for over 47 million people, or about 15 percent of the U.S. population. The Medicare program is a vital safety net for our nation’s seniors and disabled citizens, and it is critical that the program remain financially sound.

When the economy weakens and tax revenues decline, the Federal Government often experiences budget deficits. To finance these deficits, the Government borrows money by selling securities, such as Treasury bonds, to investors in the secondary market. The debt held by the public results from these borrowing activities.

In recent years, rising health care costs have been a major driver of increases in Federal spending and debt. As baby boomers age and health care costs continue to grow faster than inflation, those trends are expected to continue. As a result, the Medicare Trust Fund is projected to become insolvent in 2026— meaning it will not have enough money to pay all of its obligations. The financial challenges facing Medicare are significant, but they can be addressed through a combination of responsible spending reductions and revenue increases.

The Federal Government’s Unemployment Insurance Trust Fund

The Federal government’s unemployment insurance trust fund is used to finance a budget deficit. The trust fund is a revenue source that is used to help pay for unemployment benefits. The trust fund is made up of payroll taxes that are collected from employers. The tax revenue that is collected is used to help pay for the cost of providing unemployment benefits.