The national budget receives plenty of press - especially when it is running a deficit. But just what does running a deficit mean, how does it happen and how does it affect the economy? Read on to find out why this issue is such a polarizing item in households and corporations across the nation.

The U.S. government experiences a budget surplus when it takes in more revenue than it pays out for all government expenditures combined. The opposite occurs when it pays out more than it takes in, creating a budget deficit. At times in history the U.S. budget deficit has been quite large, while at other times the budget has achieved a balance or run a surplus. The reasons for deficits vary over time, and there is constant debate over the need for them.

Like a Loan, Only Bigger
Carrying a deficit balance on the U.S. budget is very similar to a long-term loan, but on a much larger scale. With a balanced budget, the government spends tax receipts and other sources of revenue in amounts roughly equal to what it receives. While this is a basic representation, it is what the government strives for in a best-case scenario.

Unfortunately, it is difficult to carry a balanced budget or a surplus when the country needs to make payments for national services, programs, defense, and other domestic and foreign expenditures. If there is a shortfall, the government has several options. It can either print new currency or finance the debt with government bills, notes and bonds. Cutting spending and raising taxes are also options, but they are difficult to implement, especially when the spending needs that helped create the deficit in the first place are pressing. Printing new currency can create inflation, while issuing bills or bonds can widen the deficit as the cost of the debt payments mounts. While neither option is desirable, they both may be necessary to battle a deficit.

Sources of Spending
Chart 1 below represents the spending sources of the U.S. government. There is a clear correlation between the Treasury spending, which includes debt payments, and the level of total spending that leads to the deficit spending.

Chart 1

The Treasury keeps a running daily total at this website:

Chart 2: This chart represents income and expenses of the U.S. Government from 1913 to 2008.

It is clear that, until the early 1980s, the U.S. government was able to spend approximately as much as it received from the following sources:

Chart 3

After the '80s, carrying a budget deficit was pretty routine, except for the period around 2000, when tax receipts were plentiful as the economy finished a growth spurt and spending was in check. After 2001, spending increased dramatically as defense expenditures increased and receipts fell from tax revenues at both the corporate and individual level.

The Budget Process of the United States Government
Each year, the president presents the proposed budget to Congress for the next fiscal year. The U.S. Government works on a fiscal calendar ending on September 30. The House of Representatives and the Senate review the proposed budget, following the guidelines created by the Budget and Accounting Act of 1921. Then, the dance begins as appropriation committees propose spending limits and approve appropriation bills, which are sent to the president. This is where the president can approve or veto the bills, with the goal of ultimately getting an approved overall budget. The president also has the option of requesting special and emergency funding to be used for a variety of uses, including defense and natural disasters. An example of this is the bailout packages provided by President Barack Obama in 2008-2009.

Deficit, Good or Bad?
While it may be hard to find anyone who thinks it's a great idea to carry a budget deficit, there are times when a deficit can be expected. Keynesian economists argue that it is the responsibility of the U.S. government to assist the economy as it experiences ups and downs in the business cycle. They would probably approve of providing government spending as a stimulus and lowering taxes to smooth out the cycles, which would create what they might consider an acceptable level of deficit spending. (For more on John Maynard Keynes, see Giants Of Finance: John Maynard Keynes and Can Keynesian Economics Reduce Boom-Bust Cycles?)

Others believe that serious consequences could result from deficit-financed spending. In the 1970s, the "crowded out" theory was introduced. The theory implies that the increased spending and lending by the government can create a "crowding out" effect by competing with private spending and financing.

Carrying a budget deficit may not be pleasant to deal with, especially when economic times are tough or during times of war. The implications can range from an endless, repeating pattern of deficit spending to a negative effect on the value of the dollar. As budget deficits become accepted each year as a necessary evil, they may emerge as a normal way to carry our country into the future. They are hotly debated, especially by those who oppose their presence and their long-term effects. It can take years for the benefits or damage to become evident.

Whatever your opinion on a budget deficit may be, it is clear that until spending and revenues can be put back in balance, this state of affairs may continue to be the norm.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.