Executive summary

Deficit spending (also known as a budget deficit) occurs when governments spend more money than they bring in from revenues, such as taxes, customs duties/tariffs, and fees for services that the nation offers. As a nation’s deficits accumulate, they create a national debt, which is paid back over time through government-issued bonds (Tardi np). 

In the Keynesian school of economic theory, governments employ deficit spending to stimulate the economy in times of economic downturn, war, or disaster (Jahan et al np). Conversely, Keynesian theory also holds that during times of economic prosperity, governments reign in spending and keep balanced budgets (or generate surpluses) to save for “rainy days” in the future (Yueh np).

However, the United States federal government has run a budget deficit continuously since 2001 through both economic booms and busts, expensive overseas wars, a series of major tax cuts, a global pandemic, and a new arms race with Russia and China. As a result of these last twenty-three years of uncontrolled deficit spending has resulted in the growth of a $35 trillion national debt that has increasingly become a major threat to the solvency of the United States federal government and the nation’s long-term economic stability (Wagner np). Thus, this policy brief will focus on policies that the U.S. can implement to reduce (and potentially eliminate) the federal budget deficit. 

Overview

On August 2, 2023 Fitch Ratings Inc., one of America’s “Big Three” credit rating agencies, (Finney np) downgraded the credit rating of the United States from the AAA to AA+ (Barbuscia np), in a major blow to America’s financial prowess. The downgrade came amidst the 2023 U.S. debt ceiling crisis, in which the Republican-controlled House of Representatives refused to raise the debt ceiling as the U.S. government rapidly approached a default on its sovereign debt (Peterson and Murray 2-7). Yet, while these events went largely unnoticed outside of Washington D.C. and Wall Street circles, they reignited a serious debate in the United States concerning the long-term sustainability of federal deficit spending on the domestic and global economy.

Pointed Summary

• Federal deficit spending has resulted in a massive national debt that has left the U.S. government and taxpayer in a difficult financial situation.
• Congress needs to ensure that it can continue to meet its mandatory spending requirements (under programs such as Social Security, Medicare, Medicaid, and veterans’ pensions) in the future while also having remaining funds for discretionary spending.
• Treasury bills are essential for funding the U.S. government when revenues are less than spending. In order for Treasury bills to remain valuable and  highly sought after by investors around the world, the U.S. must ensure its solvency to continue receiving these loans. 

Relevance

The increasingly large federal deficit has contributed to a U.S. national debt of approximately $35 trillion (as of November 2024) and is over 120% of GDP. This has led investors abroad to question the long-term economic health of the United States and weakened the nation’s credit rating, which helps to keep interest rates low and the economy strong (Tardi np). 

History

Two decades of high spending and low taxation has caused the government to engage in federal deficit spending year after year, which has resulted in the growth of the United States’ national debt to ~$35.46 trillion, which represents 122.3% of the U.S. GDP (gross domestic product) ("What is the national debt?" np). 

At the start of the 21st century, the Clinton Administration had the nation on track to paying off the entirety of the national debt by 2012, as it achieved surpluses in FYs 1998, 1999, and 2000. Previously, the Clinton Administration had spent the first five years of its administration working with members of both the Democratic and Republican in Congress to pass legislation increasing taxes, reforming welfare programs, and making significant cuts to discretionary federal spending ("The Clinton Presidency: Historic Economic Growth" ). 

However, following the election of Texas Governor George W. Bush over then-Vice President Al Gore in 2000, the new administration largely moved away from the previous administration’s emphasis on fiscal responsibility. In 2001 and 2003, the Bush Administration passed major tax cuts, decreasing federal revenues. At the same time, following the 9/11 attacks and the beginning of the War on Terror, the administration began to spend trillions funding the War in Afghanistan, Invasion of Iraq, establish the Department of Homeland Security, and support veterans returning home (de Rugy np). 

The Great Recession fueled further deficit spending and national debt growth. With the collapse of financial giants such as Lehman Brothers and AIG, President Bush signed the Emergency Economic Stabilization Act of 2008, which established the $700 billion Troubled Asset Relief Program (TARP), which was effectively a bailout. In 2009, as America reeled from the effects of the Great Recession, President Obama signed the American Recovery and Reinvestment Act, which served as a $831 billion economic stimulus for the weakened economy (Weinberg np). The rest of the Obama administration saw a slowed continuation of federal deficits and debt growth as increased spending on wars in the Middle East and healthcare investments (through the creation of Obamacare) increased the debt.

The debt spiked again during the presidency of Donald Trump. The 2017 Tax Cuts and Jobs Act reduced revenues over a ten-year period by $9.75 trillion (Kogan np). Simultaneously, Trump increased discretionary spending significantly, pouring billions into the Department of Defense and Homeland Security. 

With the outbreak of the COVID-19 pandemic, the U.S. again incurred massive deficits through a series of stimulus packages aimed at preventing economic collapse. These pieces of legislation included the CARES Act ($2.2 trillion), Paycheck Protection Program and Health Care Enhancement Act ($484 billion),  Paycheck Protection Program ($954 billion), Consolidated Appropriations Act ($2.3 trillion), American Rescue Plan ($1.9 trillion), and Inflation Reduction Act ($891 billion) (Moss, et al np)

Finally, the Biden Administration’s major spending on infrastructure, through the Infrastructure Investment and Jobs Act and CHIPS Act, along with aid to Ukraine, have also contributed to further spikes in the debt more recently ("President Joe Biden: Investing in America" np). 

All in all, the last two decades of high spending, low taxation, and major geopolitical dynamics have led the U.S. to an unprecedented financial situation that must be addressed.

Current Stances

The issue pertaining to federal deficit spending and the national debt remains ongoing. Each year, particularly when the U.S. has divided government, the President fights with Congress to raise the debt ceiling and creates a budget crisis. In recent years, government shutdowns have also become increasingly common, with shutdowns occurring as recently as 2013, 2018, and 2018-2019 ("A Brief History of Government Shutdowns and Why Other Countries Do Not Have Them" np).

Tried Policy

The last time a presidential administration focused on balancing the federal budget by reducing (and eventually, eliminating) federal deficit spending was during the presidency of Bill Clinton, who served from 1993 to 2001. When President Clinton took office in January 1993, the U.S. federal budget deficit was $290 billion, an all time high, coming off of the Persian Gulf War. Thus, after he took office, President Clinton made it a priority of his administration to balance the federal budget through a mix of tax increases, welfare reforms, and spending cuts ("The Clinton Presidency: Historic Economic Growth" ). 

In order to reduce the federal budget deficit, Clinton and his Democratic allies in Congress enacted the Deficit Reduction Plan in 1993. The omnibus bill both raised taxes and made significant spending cuts. The bill increased taxes on gasoline, corporations, and individuals in the highest tax bracket. Additionally, the bill cut over $255 billion in discretionary spending over a five year period (Peters np). Four years later in 1997, President Clinton negotiated with Democrats and Republicans in Congress to implement the Balanced Budget Agreement, which cut over $12 billion in spending over a five year period, much of which came from Medicare (McCall et al np). The agreement aimed to balance the federal budget by 2002. Additionally, other legislation, such as the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) ("Public Impact Fundamentals" np) and Congress’ $120 billion cut to the Department of Defense budget,  amidst the fall of the Soviet Union, also helped the administration to eliminate the federal budget deficit (Spring np).

President Clinton’s plan was ultimately successful in eliminating the United States federal government’s budget deficit in the short-term. In 1997, Congress passed a balanced budget for the first time in decades for the 1998 FY. Between FY 1998 and 2000, the U.S. ran three successive budget surpluses, the highest of which was in 2000, which paid off cumulative $363 billion of national debt. This budget surplus also lowered interest payments on the national debt by $125 billion. This had a ripple effect throughout the U.S. economy. As a result of the balanced budget and budget surpluses, interest rates decreased, causing the average American family to experience a decrease in mortgage payments by $2,000. Under Clinton’s plan, Medicare solvency was also extended from 1999 to 2025 and Social Security was saved indefinitely ("The Clinton Presidency: Historic Economic Growth" ).

Thus, the Clinton Administration reflects the most modern, comprehensive effort in the United States to balance the federal budget. 

Policy Problem

A. Stakeholders

• American Taxpayers
  
  • American taxpayers ultimately are the most important stakeholders in this issue. American taxpayers support and fund  the federal government’s activities with their personal wealth. Congress must ensure they responsibly spend the public’s money, do not shift an unfair burden onto the taxpayer, and do everything they can to protect the American taxpayer from undeserved economic hardship due to their actions.
• American and Global Consumers
  
  • By maintaining a healthy budget, Congress can keep interest rates low. Low interest rates make the labor market stronger, causes the economy to grow faster, and allows goods to be cheaper. 
• Holders of U.S. Treasury Bonds
  
  • The $35.5 trillion of U.S. federal debt it owed to millions of investors globally. These investors pour trillions into the U.S. Treasuries because of their trust in the United States. Ensuring long-term solvency is fair to both the investors and upholds America's financial prowess globally.
• Future Generations of Americans
  
  • Congress must ensure that they are fiscally responsible now so they avoid placing an undue burden on future generations of Americans, who will simply be unable to pay back the debt their ancestors incurred decades before.

B. Risks of Indifference

If Congress and the President continue to neglect this issue, the United States could eventually default on its debt. This would result in disastrous effects for the U.S. government, the global economy, and American consumers. A default would lead to an automatic government shutdown, leaving millions of federal workers unpaid and all but essential military/law enforcement agencies operating. Additionally, global securities and commodities markets would likely crash, destroying millions of Americans’ savings, businesses, and livelihoods. As a result of this, many businesses would collapse and unemployment would skyrocket. As the U.S. would try to navigate itself out of the crisis, foreign investment into the U.S. would likely dry up. Finally, and worst of all, benefits like Medicare, Medicaid, Social Security, and SNAP would all dry up, leaving millions of Americans with no one to turn to (Desjardins and Barajas np). 

C. Nonpartisan Reasoning

According to PBS, most Americans agree that Congress spends too much money and that the national debt should be reduced (Desjardins and Barajas np). However, Democrats and Republicans have significantly different views on how the government should solve this issue. Democrats believe that taxes need to be increased on all Americans, that the wealthiest of Americans and corporations need to be taxed more. Republicans, on the other hand, believe that cuts need to be made to non-defense discretionary spending and that mandatory spending needs to be reformed to lower prices. They also believe in the privatization of many of the federal government’s current duties. 

Policy Options

In order for future Presidents and Congresses to address the looming budget problem, they must evaluate their three main policy options, each based on the fundamental beliefs of different political ideologies. 

A policy option in-line with traditional economic liberalism and the left-wing political ideology espoused in the modern Democratic Party would involve raising taxes and making only a few select cuts to the federal budget. More specifically, the plan would raise income taxes on all Americans, aggressively tax billionaires and capital gains, and make significant cuts to the Department of Defense. However, this policy would likely resist cuts to welfare programs such Medicare, Medicaid, Social Security, and government pensions. It is ultimately not being selected because it does not make enough cuts to welfare programs that have dramatically increased in price over time.  

A policy option in line with traditional economic conservatism and the ideology of the pre-MAGA Republican Party would likely focus on making significant cuts to welfare programs and simplifying the tax code. Social Security would likely be privatized and work requirements would be placed onto Medicare and Medicaid benefits. Additionally, this policy option would likely see the closure of many tax loopholes to force the wealthy to pay taxes in the U.S., but ultimately lower the tax rate to attract more economic growth and discourage tax evasion. This policy option is ultimately not being considered due to its refusal to raise taxes and unrealistic cuts to social services that many sick, disabled, and elderly Americans rely on. 

Conclusions

It is ultimately  in the best interest of the United States to pursue a neoliberal “Third Way” political ideology (much like that of the Clinton-Gore Administration) to address America’s budget crisis. Partisan extremes on either side are unrealistic and do not compromise. In today’s society, cuts to both wasteful government spending and tax increases on the wealthiest of Americans are needed to help the nation first achieve financial stability. The country should aim to balance the budget over the next five years through tax increases on the wealthiest of Americans and reforms to Medicare and Medicaid, and SNAP benefits. From there, the country should aim for sizable surpluses and pay off the national debt and ensure the long-term health of Social Security. 

Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Gwen Singer, Mason Carlisle, Lilly Kurtz, Paul Kramer. and other contributors for developing and maintaining the Fellowship Program within the Institute.

Work Cited

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