Fiscal Deficit: Definition and History in the U.S.

What Is a Fiscal Deficit?

A fiscal deficit refers to the shortfall in a government’s revenue compared to its spending during a certain period. When a country runs a fiscal deficit, it means the government spends beyond its means. Fiscal deficits are calculated either as a percentage of a country’s gross domestic product (GDP) or by determining the amount of spending over revenue.

Fiscal deficits are different from fiscal debts and fiscal imbalances. They are also the opposite of fiscal surpluses.

Understanding the Fiscal Deficit

A fiscal deficit, which is also commonly called a national deficit, occurs when a country’s government spends more money than it earns during the fiscal year. This means that more money goes out compared to how much comes in. Therefore, spending exceeds revenue. Governments may boost spending for social programs like Social Security and healthcare or for other things like military spending and infrastructure.

The size of a fiscal or national deficit depends entirely on a few factors, including:

• The state of a country’s economy (unemployment, business revenue, prices)
• Fiscal policies (government spending and the collection of revenue)

Governments often run deficits when there are signs of a distressed economy. For instance, they may reduce taxes or increase spending to encourage consumer spending or boost economic activity. This typically happens when there is inflationary pressure or the economy is going through a recession. A government that needs more money than it can spend typically borrows money from the public or other governments.

Deficits are normally calculated and reported as a percentage of a company’s GDP. It may also be reported as a dollar figure or a country’s revenue (or income) less spending. As noted above, when spending exceeds revenue or income, it results in a negative balance or a fiscal deficit.

Support and Criticism of Fiscal Deficits

A fiscal deficit is not universally regarded as a negative event. For example, the influential economist John Maynard Keynes argued that deficit spending and the debts incurred to sustain that spending can help countries climb out of economic recession.

Fiscal conservatives, on the other hand, generally argue against deficits. Rather, they favor a balanced budget policy where spending equals revenue, leaving neither a deficit nor a surplus.

Fiscal Deficit vs. Fiscal Debt vs. Fiscal Imbalance

Don’t confuse the term “fiscal deficit” with fiscal debt or fiscal imbalance. The three are very different concepts.

Fiscal Debt

Remember, a fiscal deficit means the government spends more than it earns in revenue. The term “fiscal debt” is also called a national debt. A fiscal debt, on the other hand, is the total amount of debt that a government owes to its creditors. Governments often borrow money to pay for certain expenditures, including infrastructure and social programs.

A country’s fiscal debt is accumulated over years of deficit spending and is composed of different types of debt, including:

• Debt held by the public, such as bonds, bills, and notes
• Debt held by foreign countries
• Trust funds held by the federal government

As of Jan. 27, 2025, the U.S. government’s fiscal debt was roughly $36.22 trillion. Of this figure, $28.86 trillion was held by the public while over $7.35 trillion covered intragovernmental holdings.

Fiscal Imbalance

Fiscal deficits are also different from fiscal imbalances. A fiscal imbalance is a measure of the difference between future debt obligations and future revenue streams. This means that a country’s future debt isn’t in line with its future revenue.

Fiscal imbalances happen when a country’s spending isn’t able to keep up with its ability to earn revenue to fund its spending and debt obligations over the long term.

Fiscal Deficit vs. Fiscal Surplus

A fiscal deficit is the opposite of a fiscal surplus, which is also called a national surplus or a budget surplus. A surplus occurs when a country’s government’s revenue exceeds its spending. Governments with budget surpluses can use the extra cash to fund new investments or to pay off their financial obligations.

Since World War II, the U.S. government has run at a fiscal deficit in most years. But the budget hasn’t been in the red for the entire history of the United States, as there have been times when the government ran a surplus.

• President Harry Truman pulled the country’s budget from a deficit to a surplus after World War II. He ran a fiscal surplus in 1947, 1948, and 1951.
• President Dwight Eisenhower’s government had small deficits for several years before producing small surpluses in 1956, 1957, and 1960.
• President Richard Nixon had just one surplus, in 1969.

The next federal surplus did not occur until 1998, when President Bill Clinton reached a landmark budget deal with Congress that resulted in a $70 billion surplus. The surplus grew to $236 billion in 2000. President George W. Bush benefited from a $128 billion carryover of the Clinton surplus in 2001.

Examples of Fiscal Deficits

The U.S. government has run fiscal deficits since the nation declared independence. Alexander Hamilton, the first secretary of the Treasury, proposed issuing bonds to pay off the debts incurred by the states during the Revolutionary War.

At the height of the Depression, President Franklin D. Roosevelt holds the record for the fastest-growing U.S. fiscal deficits. The New Deal policies designed to pull America out of the Great Depression, combined with the need to finance the country’s entry into World War II, drove the federal deficit from 4.5% of GDP in 1932 to 26.8% in 1943. He also issued the first U.S. savings bonds to encourage Americans to save more and, not incidentally, finance government spending.

Let’s look at some of the deficits following the 2007–2009 financial crisis:

• In 2009, President Barack Obama increased the deficit to more than $1 trillion to finance the government stimulus programs designed to fight off the Great Recession. That was a record dollar number but was only 9.7% of GDP, far under the numbers reached in the 1940s.
• In 2020, under President Donald Trump, the deficit reached $3.1 trillion for the entire fiscal year due to a combination of tax cuts and increased spending amid the COVID-19 pandemic and subsequent economic fallout.
• In 2024, the federal deficit reached $1.83 trillion in the final full year of President Joe Biden’s term. According to the U.S. Department of the Treasury, the deficit was the result of $6.75 trillion in spending vs. $4.92 trillion in revenue.
• As of Jan. 17, 2025, the federal deficit is projected to reach $1.9 trillion under President Trump in the first year of his second term. According to the Congressional Budget Office (CBO), the deficit is the result of $7 trillion in projected spending vs. $5.2 trillion in projected revenue.

The Bottom Line

A fiscal deficit is the negative difference between a country’s revenue and spending. This means a government ends up with a deficit when it spends more than it earns in revenue.

Although it has a negative connotation, running a deficit isn’t always bad. It can help pull a country out of an economic slump and encourage consumers to spend more. But long-term deficits may affect the overall health and well-being of a nation’s economy, so policymakers should be mindful of loosening the purse strings over the long term.