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Fiscal Deficit

By
Lia Kopin-Green
/
March 20, 2023

What is a Fiscal Deficit?

A fiscal deficit occurs when the United States government spends more money than it receives in revenue. It generally refers to the amount by which the government’s total expenditures exceed its total revenues in a given period, usually one fiscal year. Simply put, a government that has a fiscal deficit is spending beyond its means.

Key Takeaways

  • A fiscal deficit occurs when a government spends more money than it receives in revenue. 
  • Fiscal deficits are typically solved by government borrowing.
  • Since World War II, the US government has had a fiscal deficit in most years.

Fiscal Deficits in the United States

The federal government of the United States has many different means of collecting revenues. Some common sources include individual and corporate income taxes, payroll taxes and tariffs. The government uses this revenue to finance a variety of programs and services, including but not limited to defense, education, healthcare, and social welfare programs.

In some cases, the government spends more money than it takes through revenue. This can happen for a variety of reasons. For example, during the COVID-19 pandemic, the government was forced to provide stimulus payments and increased spending on healthcare and vaccine research. While these expenses were necessary in order to properly respond to this unexpected event, these expenditures contributed to a larger budget deficit.

Another common cause of a fiscal deficit is long-term funding to certain programs and services. For instance, programs such as Social Security and Medicare require ongoing expenditures. Committing to the funding of these systems can cause a significant deficit in the government’s revenue.

Financing a Fiscal Deficit

In order to fill in the gap caused by a fiscal deficit, the US government must borrow funds to make up the difference. The initial borrowing is typically done through the sale of government securities known as Treasury bonds (T-bonds). According to this model, individuals, businesses and other governments invest in the purchase of Treasury bonds with the promise of future payouts. In other words, when investors buy T-bonds, they are essentially lending money to the government. In return, the government commits to pay back these loans plus interest at a future date. Due to the fact that Treasury Bond investments are backed by the full faith and credit of the US government, they are considered to be a safe investment choice.

Bottom Line

While deficits can be necessary to address certain emergencies or economic issues, they can lead to serious long-term economic consequences. As such, it is crucial to understand how fiscal deficits work and how they are financed. Learning about the possible causes and implications of these deficits can provide valuable insight on how various economic crises influence your business.

If you would like to learn more about the current US fiscal deficit, or are interested in finding out what the deficit means for you and your business, reach out to a professional tax attorney as soon as possible. Our specialized tax attorneys are well-equipped to provide professional advice and support to anyone guidance on tax-related matters.

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