U.S. Federal Deficits and Debt: Understanding the History and Context

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Throughout its history, the U.S. federal government has often operated under a deficit, and has always held a federal debt.  Over this time there have been many debates over these issues, and the current contest over the presence of large deficits and the size of the debt is not surprising.  However, with the drastic increase of the deficit the past few years, and projections that show the persistence of large deficits because of mandatory spending, the stakes seem to be as high as ever in U.S. history.

From 1971 to 1997, the U.S. consistently operated under a deficit, fluctuating from $22 billion to $221 billion, however, this never made up more than 6% of gross domestic product (GDP).  Between 1998 and 2001, the federal government ran surpluses, even reaching $236 billion in 2000. According to a report published by the Congressional Budget Office (CBO) in 2001, if the federal government continued to operate in a surplus, the U.S. government would have been able to pay off all redeemable federal debt by 2006.  However, the trends in spending and taxation changed, and since 2001, a deficit has been incurred each year, reaching as high as $1.4 trillion in 2009, or 10% of the nation’s GDP.

The Pew Charitable Trusts recently published a report analyzing the causes of today’s debt situation compared to 10 years ago. Pew estimates that the 2001 and 2003 tax cuts made up about 13% of the change in CBO debt estimates, while the 2010 tax legislation made up 3%, and other tax cuts made up an addition 5% of the change. Altogether, these tax changes are responsible for 21% of the increased debt in the past decade. Another 29% of the increased debt is from economic slowdowns reducing revenue receipts.

Increased spending has been a significant factor in today’s deficit and debt situation as well, including increases in interest caused by a larger federal debt (11% of the change in debt), the operations in Iraq and Afghanistan (10%), other non-defense spending (10%), the American Recovery and Reinvestment Act (6%), other defense spending (5%), and Medicare drug benefits enacted in 2003 (2%). These spending changes are responsible for 44% of the decade’s debt increase.

According to CBO, projected deficits will increase the national debt by an additional $8 trillion from 2011 to 2021. Current negotiations between the President and Congress to reduce deficits are focused on cumulative reductions of $2 to $4 trillion over 10 years, which would eliminate one-quarter to one-half of the coming decade’s deficits.

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