What you need to know
If one billion dollars is equal to a school bus filled to the brim with $100 bills, the United States’ annual budget is equal to about 6,300 school buses. These funds pay for everything from keeping parks open and building new highways to unemployment benefits, the President’s salary, and the military’s tanks, planes, ships, and soldiers. At the same time, the United States has a budget deficit, meaning that more than a thousand of those school buses are filled with money that the government borrows to pay its bills. Where did this budget deficit come from? Does it matter? What needs to happen to reduce it?
- The United States federal government has a substantial budget deficit.
- What are the causes of this deficit?
- What changes would be needed to bring the budget into balance?
What is a balanced budget?
A balanced federal budget exists when the government collects as much in taxes and other revenues as it spends on government programs. The last time the U.S. had a balanced budget was in 2001.
The figure below shows that in fiscal year 2024 (October 1, 2023 – September 30, 2024), the U.S. government spent $6.93 trillion but collected $4.89 trillion in revenue, leading to a budget deficit of 2.04 trillion dollars.

Economists usually measure the deficit in terms of the size of the U.S. economy, which is measured by the Gross Domestic Product (GDP). Using this measure, the 2024 federal deficit was over 6.9% of GDP. The figure below shows annual budget deficits and surpluses measured as a percentage of GDP.

Why Is there a deficit?
Since the COVID-19 pandemic, the government has had historically high budget deficits. First, business closures and unemployment from the COVID-19 pandemic led to a significant reduction in tax revenue. At the same time, the federal government spent over six trillion dollars to combat the pandemic, develop and distribute vaccines, and assist businesses and individuals. In 2021 and 2022, Congress passed additional large spending packages on capital infrastructure, credits for renewable energy systems, and rebuilding the domestic chip (integrated circuit) production industry.
In addition to spending increases, the current budget deficits are a function of tax cuts and program changes enacted by Congress and the President. The last balanced budget in 2001 disappeared after tax cuts in 2001 & 2003, while tax cuts in 2017 reduced government revenue by about $1.3 trillion between 2018 and 2024.
Do budget deficits matter?
Most economists believe that small or temporary federal deficits have little or no impact on economic conditions such as growth, unemployment, and inflation. However, problems may arise if the national debt (accumulated deficits) becomes too large.
Because budget deficits are funded by selling government bonds, a rising debt draws away some funds that might otherwise be used for productive capital investments. Increased debt also requires a portion of government revenue to be used for interest payments, reducing the amount of funds available for other needs, particularly unexpected problems. Currently, the U.S. pays more in debt payments than it does for veterans’ benefits, education, disaster relief, agriculture, science and space programs, foreign aid, natural resources, and environmental protection combined.
Increased government borrowing can also lead to higher interest rates, making it harder for firms to borrow money for new initiatives and increasing the cost of mortgages and car loans. Higher interest rates can also reduce exports and economic growth.
What changes are needed to balance the federal budget?
To have a balanced budget, the amount of money the federal government collects in taxes and other revenue must equal the amount of money it spends on programs and services. This change can happen by increasing taxes, reducing spending, or a combination of the two.
The most important question regarding spending cuts is whether some programs should be exempt from deficit-reduction efforts. Should Social Security and Medicare be excluded? What about defense spending? A 2020 study by the Congressional Budget Office details the impact of different strategies.

The figure shows that if no programs are exempt, spending must be reduced by about 25% across the board to balance the budget in ten years. If defense and veterans programs as well as Social Security and Medicare, are excluded, about 30% in cuts across the board are required. If defense and veterans programs, as well as Social Security and Medicare, are excluded, remaining programs would need to be cut by about 85% to achieve balance.
On the taxation side, repealing the 2017 tax cuts under the first Trump administration would generate almost $2 trillion over ten years, about a third of the amount needed to bring the budget into balance. Expanding the 2017 cuts is anticipated to increase the deficit by about $4 trillion over the next ten years.
The Take-Away
America’s budget deficit is large by any measure.
Budget deficits can negatively impact inflation, employment, and economic growth. While the actual impact has been small thus far, the impact of future deficits is not guaranteed to be the same.
The difficulty with reducing the budget deficit is the magnitude of spending cuts (or tax increases) needed to bring the budget into balance, particularly if some programs (such as entitlements and defense spending) are excluded.
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Further reading
Congressional Budget Office. (2020). Options for reducing the deficit: 2021 to 2030. Accessed 2/10/23, available at https://www.cbo.gov/publication/56783
Committee for a Responsible Federal Budget. (2023). Debt Fixer. www.crfb.org/debtfixer, accessed 4/15/23.
Weinstock , L. R. (2021). Federal deficits, growing debt, and the economy in the wake of COVID-19. Congressional Research Service. accessed 2/10/23, available at https://crsreports.congress.gov/product/pdf/R/R46729
Sources
Bureau of Economic Analysis. 2025. Gross Domestic Product, Fourth Quarter and Year 2024. Accessed 4/2/25, available athttps://tinyurl.com/by7nwz9w
Congressional Budget Office. 2020. Options for reducing the deficit: 2021 to 2030. Accessed 2/10/23, available at https://www.cbo.gov/publication/56783
Labonte, M. (2008). Do Budget Deficits Push Up Interest Rates and Is This the Relevant Question? Congressional Research Service, accessed 3/23/23, available at https://crsreports.congress.gov/product/pdf/RL/RL31775/6
Rivlin, A. M. & Sawhill, I. V. 2019. How to balance the budget. Brookings, accessed 2/10/23, available at https://tinyurl.com/mva3y79u
Rogers, D. 2018. POLITICO Analysis: At 2.3 trillion cost, Trump Tax Cuts Leave Big Gap. Politico, accessed 3/16/23, available at https://tinyurl.com/cd8s5fz2
USAspending.gov. 2023. COVID-19 Spending. Accessed 3/6/23, available at https://tinyurl.com/27vt5ehj
United States Treasury. 2025. What is the national deficit? FiscalData. https://tinyurl.com/5eh2ndnn, accessed 4/2/25.
Contributors
John Arnold (Intern) Is a sophomore at Binghamton University majoring in Political Science and Economics
Robert Holahan (Content Lead) is Associate Professor of Political Science and Faculty-in-Residence of the Dickinson Research Team (DiRT) at Binghamton University (SUNY). He holds a PhD in Political Science from Indiana University where his advisor was Nobel Laureate Elinor Ostrom. His research focuses on natural resource policy, particularly in domestic oil and gas production, but also extends into international environmental policy. He was PI on a National Science Foundation grant that utilized a 3000-person mail-based survey, several internet-based surveys, and a series of laboratory economics experiments to better understand Americans’ perspectives on energy production issues like oil drilling and wind farm development.
William Bianco is Professor of Political Science at Indiana University and Founding Director of the Indiana Political Analytics Workshop. He received his PhD from the University of Rochester. His teaching focuses on first-year students and the Introduction to American Government class, emphasizing quantitative literacy. He is the co-author of American Politics Today, an introductory textbook published by W. W. Norton now in its 8th edition, and authored a second textbook, American Politics: Strategy and Choice. His research program is on American politics, including Trust: Representatives and Constituents and numerous articles. He was also the PI or Co-PI for seven National Science Foundation grants and a current grant from the Russell Sage Foundation on the sources of inequalities in federal COVID assistance programs. His op-eds have been published in the Washington Post, the Indianapolis Star, Newsday, and other venues.