A Budget Deficit occurs when government spending (outlays) is greater than its revenue (receipts). To break it down further, Outlays are payment obligations for specific programs and Receipts is the money generated through taxes. For the United States Federal Government, the three main sources for federal tax revenue are individual income tax (50% of all revenue), payroll tax (35%), and corporate income tax (7%). Based on research by The Center on Budget and Policy Priorities, in 2019 healthcare was the primary outlay obligation making up about 25% of the federal budget. Coming in second was Social Security at 23%, and military spending was the third most prominent category at 16%.
As a measurement, a deficit or surplus is best presented as a percentage of the Gross Domestic Product (GDP). This ratio helps examine the relationship between the deficit and the overall economy. If an economy is growing at a healthy rate the deficit should decrease on a year to year basis. This is because under a growing economy more taxes will be paid which increases revenue. However, if an economy is growing and the deficit is increasing this is a sign that the outlays vs. receipts is unbalanced and the economy isn’t growing strong enough to bridge the gap.
A prime example was Fiscal Year 2018. After the Tax Cuts and Job Act of 2017 was implemented revenue for the Federal Government decreased significantly. Based on analysis by the Tax Foundation, over the last fifty years “revenues have averaged 17.4% of GDP while outlays have averaged 20.3 percent of GDP.” However, in FY2018, revenue fell to 16.4%, while spending remained in-line with its 50-year average. Unfortunately, the tax cut failed to stimulate the economy and the deficit to GDP increased by 17% compared to FY2017.
The table and graph below break-down the Federal Government’s fiscal year Budget Deficit/Surplus. Government budgets are based off the fiscal year calendar which runs from October 1st to September 30th of the following year. Also note that a surplus is designated with a minus sign. The formula is outlays minus receipts, which means if the receipts is greater than the outlays there’s a surplus. Which in turn means that a surplus will be represented as a negative quantity.