Fiscal Deficit

Loading the player...

What is 'Fiscal Deficit'

A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.

A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.

BREAKING DOWN 'Fiscal Deficit'

Fiscal Deficits Through Time

Fiscal deficits have been occurring since the founding of the United States. As the secretary of the Treasury in the 1790s, Alexander Hamilton proposed that the debts incurred by the states during the Revolutionary War be repaid by issuing bonds. The interest payments created federal deficits that eventually disappeared when the debts were fully paid in the 1860s. All subsequent wars were financed with debt, creating large federal deficits. The largest federal deficits were created during World War I and World War II, reaching 17 and 24% of gross domestic product (GDP) respectively.

Presidents and Federal Deficits

In the modern era, Franklin D. Roosevelt holds the record for the highest federal deficits. Between financing the war and implementing his New Deal policies, the federal deficit grew to $568 billion in 1949, representing a negative 29.6% of GDP. The federal deficit continued to remain high through the war years, and was eventually reduced to $88 billion, or 4.6% of GDP under Harry S. Truman. For the next two decades through 2008, the federal deficit averaged less than a negative 4% of GDP. In 2009, as part of his stimulus program to fight off a recession, Barack Obama increased the deficit to more than $1 trillion for the first time in history, where it remained for the first four years of his presidency.

Rare Federal Surpluses

Since World War II, there have been just six federal surpluses. Truman managed to overcome a massive amount of interest payments to produce an $33 billion surplus in 1947, followed by an $88.6 billion surplus in 1948 and a $42.7 billion surplus in 1951. After a few years of small deficits, Dwight Eisenhower brought small surpluses back in 1956 and 1957. The next federal surplus did not occur until 1998 under Bill Clinton through a landmark budget deal with Congress that created a $87.9 billion surplus. The surplus grew to $290 billion in 2000. George W. Bush benefited from a carryover of Clinton's surplus with a $154 billion surplus in 2001.