Budget Deficit

A budget deficit occurs when a government spends more money than it collects in revenue during a fiscal year. The U.S. federal government ran a deficit of $1.8 trillion in fiscal year 2025, equal to 5.9% of gross domestic product. In the last 50 years, the federal budget has produced a surplus only four times, most recently in 2001. Every year the government runs a deficit, it covers the gap by selling Treasury bills, notes, bonds, and inflation-protected securities.

Think of it like a household that charges more to its credit card each month than it earns: the balance grows every year, and the interest on that balance eventually becomes a meaningful expense on its own.

Deficit and Debt Are Not the Same Thing

The deficit is the annual shortfall between spending and revenue in a single fiscal year. The debt is the cumulative total of all past deficits minus any surpluses, plus accrued interest. If the government runs a $1.8 trillion deficit this year, the national debt grows by that amount. The debt does not reset. It compounds.

The Congressional Budget Office projects the debt-to-GDP ratio will reach 129% by 2035, up from 99% at the end of 2020. That trajectory is driven by a structural mismatch between program spending and revenue, and by rising interest payments on accumulated debt as interest rates remain elevated.

Cyclical and Structural Deficits Have Different Causes

A cyclical deficit appears during economic downturns. When the economy contracts, tax revenues fall because incomes and corporate profits decline. Simultaneously, government spending rises automatically through unemployment insurance and other safety net programs. A cyclical deficit typically reverses when growth resumes.

A structural deficit persists regardless of economic conditions. It reflects a fundamental mismatch where the government has committed to more spending than the current tax structure collects. The United States has been running a structural deficit for decades, meaning even strong economic growth only narrows it rather than eliminating it.

Deficit Spending Has Both Short-Term Benefits and Long-Term Costs

During a recession, deficit spending supports aggregate demand by injecting money into the economy when private spending contracts. The COVID-19 response demonstrated this at scale: federal spending increased dramatically in 2020 and 2021 to offset the economic shock. The tradeoff was a sharp increase in both the deficit and the accumulated debt.

The long-term cost of persistent deficits is higher interest payments. As debt grows and interest rates rise, the interest line in the federal budget takes up a larger share of spending. That leaves less room for discretionary priorities and puts upward pressure on borrowing costs across the broader economy.

Sources:
https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/
https://www.cbpp.org/research/federal-budget/deficits-debt-and-interest
https://en.wikipedia.org/wiki/Government_budget_balance
https://usafacts.org/articles/budget-deficit-definition/
https://www.pgpf.org/article/debt-vs-deficits-whats-the-difference/