What Is the Meaning of Budget Deficit?

Deficits occur when spending outstrips funding.

With the federal debt at historical highs, many politicians, economists, investors and Americans are worried about the country's financial health. Obviously the U.S. government has many obligations, which makes it hard to rein in spending. Increased taxes or decreased benefits are two ways to reduce expenditures, but neither option is popular and can be difficult to implement. However, arguably the deficit is not as meaningful a measure of the country's financial health as the overall federal debt.

Definition

A deficit is the amount of money that a person or organization spends in excess of what it earns or takes in. So if a company earns $500 million one year, but spends $1 billion, it has a $500 million deficit. If a father gives his son a $10 a week allowance, but the son spends $15, he has a $5 deficit. However, most commonly, when people talk about "the deficit," they mean the federal budget deficit, or the amount of money that the U.S. government spends in excess of its revenue.

Deficit vs. Debt

As of 2010, the United States had a record level of debt of trillions of dollars. This is the total amount of money that the government owes to its various creditors. Therefore, even if the country manages a surplus one year--a 12-month period in which it does not spend more than it takes in--this does not make a very big difference to the overall amount of debt. Deficits, of course, add to the problem, but eliminating the federal deficit will not necessarily fix the larger problem--the national debt, according to the Federal Reserve Bank of St. Louis.

Deficit Causes

The main causes of the deficit are entitlement programs--Medicare, Medicaid, and Social Security. Given the rising costs of health care and an increasingly large aging population, these programs continue to increase in size, quickly outstripping revenue. However, politically it can be very difficult to cut spending to these programs, which is why little has been done in the past, despite obvious looming problems.

Possible Solutions

Many people have proposed solutions to the budget deficit and the federal debt. Some have proposed a value-added tax, also called a consumption tax, similar to those in place in Europe and the United Kingdom, but this has been repeatedly rejected. Former Federal Reserve chairman Paul Volcker has suggested that raising the retirement age would be an easier fix for Social Security, given that its effects will not be felt immediately. Emphasizing preventative medicine to reduce overall health care costs has also been on the table for some time, but is difficult to translate into reality.

Necessary Action

There is a practically unanimous consensus that the deficit, and the more-worrisome national debt, must be solved. According to the Government Accountability Office, the United States' unrestrained spending "will ultimately affect every citizen in the nation." In his testimony before Congress, Congressional Budget Office director Peter Orszag seconded this opinion, noting that "under any plausible scenario, the federal budget is on an unsustainable path---that is, the federal debt will grow much faster than the economy over the long run." Therefore, though the decisions will be difficult, the deficit and the debt cannot continue to grow uninhibited.

References

• U.S. National Debt Clock
• Is the United States Bankrupt?
• Government Accountability Office: The Federal Government's Financial Health
• The New York Times: Former Fed Chief Dampens Talk of Tax
• Congressional Budget Office: The Long-Term Budget Outlook and Options for Slowing the Growth of Health Care Costs; before the Committee on Finance, United States Senate.