Q:

How are federal budget deficits determined each year?

A:

Quick Answer

The size of federal budget deficits in any given year can be determined by exploring the relationship between government revenues and spending, reports the National Priorities Project. Deficits, which refer to a situation in which federal spending exceeds revenues, generally drive the government to borrow to cover the shortfall. Surpluses, on the other hand, are the outcome when government incomes surpass its spending.

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Full Answer

Tax and spending policies established by Congress, along with the state of the economy, influence government revenues and spending, which in turn determine the existence and size of federal deficits, explains the National Priorities Project. During unfavorable economic periods, such as the Great Depression, federal spending expands to meet the demands of needs-based programs, such as unemployment benefits and food stamps, and to stimulate greater economic activity in an effort to mitigate recession, notes the National Priorities Project.

Unfortunately, tax revenues also tend to drop during such periods as economic activity wanes in the face of unemployment and reduced corporate profitability, widening deficits, and necessitating increased borrowing by the government to cover income shortfalls, notes the National Priorities Project. For instance, in 2009, during the so-called Great Recession, the federal budget deficit was equivalent to 9.8 percent of the country's economic output. By 2015, this had fallen to 3.2 percent of the economy.

Sudden large increases in federal spending, such as during wartime, and changes in tax policy, such as tax cuts, can also trigger or enlarge federal deficits, reports the National Priorities Project.

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