The Economics of the Federal Budget Deficit

In FY1998, federal budget receipts exceeded outlays for the first time since 1969. Those surpluses continued through FY2001. At one time, those surpluses had been projected to continue, but conditions have since changed. The economy went into recession in 2001, and a stimulus package was enacted. Since then, the budget has been in deficit. The actual unified budget deficit for FY2004 was $412.1 billion. In January 2005, the Congressional Budget Office projected that there would be a budget deficit of $368 billion in FY2005, and a deficit of $295 billion in FY2006. Prior to 1998, deficit reduction was an important objective in the setting of overall budget policy. During the 1990s, a combination of budget policy and a booming economy entirely eliminated the deficit. While the budget was in surplus, there was considerable debate about what to do with it. Now that the days of surpluses are over, that is no longer be an issue. Strictly speaking, economics generally has little to say regarding whether a budget deficit is a good thing or not. Whether the budget is in deficit or surplus, and whether the budget deficit is growing or shrinking, have consequences for the performance of the economy, both in the short and long run. At the same time, the performance of the economy can have substantial effects on the budget as well.