The United States began its history indebted, owing more than $75 million after the end of the Revolutionary War in 1783. However, the first actual fiscal deficit in the federal ledger was not run until the end of that decade.
Key Takeaways
- When a nation spends more than it brings in through taxes, it ends up running a deficit.
- To fund the shortfall, governments issue debt to help finance their expenditures, known as deficit spending.
- The U.S. has utilized deficit spending to fund the government, the military, and social programs.
- The federal deficit grew during the financial crisis of 2007 and ballooned during the Covid-19 pandemic.
- The federal deficit is a contentious point for conservative lawmakers who seek to reduce the government's spending and reduce the national debt.
A History of Budget Deficits
In Sept. 1789, Alexander Hamilton, then-Secretary of the Treasury, negotiated terms with the Bank of New York and the Bank of North America to borrow $19,608.81 to address shortfalls within the U.S. budget.
Hamilton was a strong proponent of a large, powerful federal government, unlike his rival, Thomas Jefferson. He believed that running budget deficits could help the young country establish itself and actively desired to issue government bonds backed by revenue from tariffs. Hamilton's plan was based on the bonds issued by the Bank of England after its founding in 1694, which allowed Britain to raise more money than the French during their conflicts.
The American government felt empowered to borrow from that point forward, and after the War of 1812, the total government debt exceeded $119 million.
When the Debt Was Actually Paid Off
Andrew Jackson, the seventh president of the U.S., felt that running deficits was immoral and carrying debt weakened the nation. By 1835, less than six years after assuming office, Jackson paid off the entire national debt by curtailing government spending and selling off federal lands. This is the only time in U.S history that the country's total debt was completely paid off.
The Great Depression and Financing Wars
Before 1930, nearly all of the budget deficits run by the American government were the result of wars. The Civil War created huge current account deficits that left the nation owing more than $2.5 billion after 1865. The nature of debts changed after the Great Depression and the rise of Keynesian economics.
The extent to which British economist John Maynard Keynes influenced government spending in the 20th century can hardly be overstated. While both the Hoover and Roosevelt administrations extended public works projects and experimented with fiscal deficits in the face of the Great Depression, it was Keynes who provided the macroeconomic justification for running large budget deficits to stimulate aggregate demand and fight recessions.
The U.S. ran severe budget deficits during the Great Depression and World War II. During the 1940s, spending on the war effort created the largest deficits as a percentage of total gross domestic product, or GDP, in American history. A more restrained spending policy took place during the 1950s and more or less continued until the outset of the Vietnam War and Lyndon Johnson's Great Society.
$33.5 Trillion
Total U.S. debt as of Oct. 6, 2023.
Modern Deficit Spending
Since 1970, the federal government has run deficits during every fiscal year for all but four years, from 1998 to 2001. Political analysts and economists debate the effect of these cumulative budget shortfalls, but their origins are much less controversial.
The federal deficit truly started to grow during the financial crisis of 2007 to 2008 as the government bailed out banks and other companies, and engaged in quantitative easing. In 2009, the deficit started to shrink, almost reaching 2007 levels, before increasing again in 2016.
The federal deficit took a hit again during the COVID-19 pandemic with the numerous government aid packages, which resulted in the highest levels of the federal deficit. Since then, the deficit has started to shrink but remains historically high, which has been a contentious point for policymakers.
What Is the Fiscal Deficit of the Economy?
The fiscal deficit of the economy is the difference between the revenue the government brings in (primarily through taxes) and the amount it spends, which includes the salaries for government employees, public infrastructure, social programs such as Social Security and Medicare, and the military. When expenditures are more than revenues, the government runs a deficit. The difference is what the government needs to borrow to fund the shortfall, which increases the nation's debt.
Which Country Has the Highest National Debt?
In terms of total number, the U.S. has the highest national debt at $33.5 trillion dollars as of Oct. 6, 2023. As a percent of GDP, Japan has the highest, with a debt-to-GDP ratio of 214.27% as of 2022. The U.S. has a debt-to-GDP ratio of 110.15%.
How Does a Country Reduce Its Deficit?
To reduce its deficit, a country's government needs to spend less than it brings in, and this involves either bringing in more revenues (taxes) or decreasing spending; ideally a combination of the two. In the U.S. for example, to increase revenues/taxes, the government could increase the taxes on corporations or the extremely wealthy. It could also remove the income cap on Social Security taxes. To reduce spending, the government could make budget cuts, such as by reducing military expenditures.
The Bottom Line
Ever since the time of Alexander Hamilton, the U.S. government has turned to deficit spending as a means of financing wars, growing federal influence, and providing public services without having to raise taxes or cut existing programs. The country's debt has significantly ballooned since 2015, hitting a peak during the COVID-19 pandemic. Though the deficit has shrunk since then, it still remains historically large.
