What is MacroWeb?

The government budget deficit, or the amount in which government spending exceeds tax revenues, became more common in the 1930's with Roosevelt's 'The New Deal'. It remained relatively small for a number of years; the deficit was less than 1% of GDP in the 1960's. However, it doubled to 2% in the 1970's and then leaped to over 4% when it peaked at $290 billion in 1992.

The rapid increase of the national deficit in the 1970's and 1980's is largely due to three main causes. First, increased government entitlement expenditures wrung out any remaining tax dollars. As the average lifespan increases, more and more Americans are collecting benefits from subsidized programs such as Medicare and Social Security. Second, the country passed through a period of higher interest rates in the late 1970's and early 1980's. Because of rate increases, interest payments made by the government had increased dramatically from 9% to 13% of all government expenses. Recent interest rate decreases have helped bring this cost back down to just below 9%. Third, tax decreases affected the government budget. The tax revenue of the United States is about 30%, which is the lowest of all OECD countries. This relatively small amount of taxation combined with the heightened spending mentioned above led to a budget deficit.

The deficit remains a concern in fiscal policy although the rate of deficit growth has slowed. In fact, the government has even had budget surpluses in recent years. For example, the 1998 surplus of $69 billion was the first in twenty-nine years.

Sources:

Kennedy, Peter. Macroeconomic Essentials for Media Interpretations, 2^nd Edition. 2000. The MIT Press, Cambridge, Mass.

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Copyright, Garrett Snow, 2002.