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Federal Budget Deficit and Federal Debt


Budget deficit means a financial condition where the spending is above the earnings or revenue. The term is used in the context of the government and is measured generally over the period of one year. Budget deficit implies the difference between the government’s income and expenditure. Expenditure roughly includes everything the government buys and pays for like salaries, social security, health benefits etc.
It also includes the interest payments to the sources government borrowed from to cover the deficit. The federal deficit seems to have started stabilizing since the budget deficit started declining after the recession.

In 2012, the Federal Budget Deficit stood at $779 billion, then dropped to $600 billion in 2013 which further reduced to $413 billion in 2014. There has been a sharp decline in the budget deficit based on strong economic performance over these years. In the year 2014, the budget deficit has touched a 6 years low after 2008. However, government agencies do not expect the deficit to reduce further and it is expected to continue at the current levels. An improving economy coupled with spending cuts has proved effective at reducing the budget deficit over these years. A reduction in deficit also means the return to fiscal normalcy.

As the economy went into a recession at the end of 2007, deficit levels went very high which again started declining 2010 onwards as economic recovery started. An important factor behind this reduction in deficit is the sequester program which resulted as a compromise between Obama and the Republicans. The ‘sequester’ applied some tight spending limits in key areas that worked to effectively reduce the deficit. (U.S. Budget Deficit Widens, Ending Run of Shrinkage. In WSJ.) Budget deficits have declined but that does not mean the government has won the spending battle altogether. How much to collect and how much to spend remains a difficult question for the Federal government. Still, it has been the case of fastest deficit reduction since the Second World War.

Government Debt:

The deficits from year to year add up to become the government’s debt. For example a $4 billion deficit for ten years becomes $40 billion government debt. In 2014, the Federal debt stood at $17.6 trillion of which 5 trillions were held by the government agencies including social security administration.