Originally Published: 3/27/2006
THE BUDGET DEFICIT
By The Issue Wonk
Everyone has heard about the budget deficit. However, there are many who don’t understand exactly what it is. So bear with me while I explain it in terms to which everyone can relate: personal spending.
Let’s say you have a monthly income of $3,000. However, your mandatory monthly payments (housing, car, utilities, food, etc.) also come to $3,000. You have nothing left over for what is called discretionary spending; that is, spending that is desired, not mandatory. But let’s say that every month things come up where you need to spend beyond that $3,000. Maybe you or your kids need new clothes; your kids are playing soccer and need shoes; your car needs repairs. Whatever. So, every month you spend an additional $500 for these extra things. This $500 is your deficit. You are short $500 every month. And your total annual deficit is $6,000 ($500 x 12 months). In the Federal Fiscal Year (FFY) 2016, the federal government was short $587.0 billion.
Now, where do you get the money? You may borrow by using your home equity loan. You may charge it on your credit cards. You may go to your parents for a loan. Any way you look at it, you borrow the money. If you borrow $500 every month, at the end of the year you will owe $6,000. This $6,000 is not only your deficit, it now becomes your debt. This is the amount that you owe. And don’t forget that you have to pay interest on the amount that you owe.
One more thing. If you are buying your home or your car, you have debt. Now, you may be able to pay all your bills every month, have money for the extras, and maybe even tuck a little away in your savings account (surplus). So, you do not have deficit. However, you still have debt – what you owe on your home and your car. It's important to know the difference between deficit and debt.
How much is too much? No economist will say how much is too much. You will, however, find writings using a baseline of 3% for a deficit; that is, the deficit should not be more than 3% of the Gross Domestic Product (GDP). Does more than 3% mean our federal budget is trouble? Not necessarily. However, if you want a “rule of thumb” just to measure where we are, 3% is probably as good a measure as any. In FFY 2016 the GDP was $18,403,000,000,000, according to the Congressional Budget Office.1 That’s $18 trillion, 403 billion dollars. And, as stated above, the deficit was $587.0 billion. That amounts to a budget deficit that is 3.18% of the GDP.
1 These numbers do not agree with those published by the U.S. Bureau of Economic Analysis. According to The Congressional Budget Office, its number is calculated from seasonally adjusted quarterly national income and product account data from the Bureau of Economic Analysis. This may or may not explain the difference.
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