Applied Learning # 1

Federal Deficit and Debt

The federal deficit is the annual difference between government spending and government revenue. Every year, the government takes in revenue in the form of taxes and other income, and spends money on various programs, such as the Army, Social Security, and even healthcare. If the government spends more than it takes in, then it runs a deficit. If the government takes in more than it spends, it runs a surplus.

The federal debt is the total amount of money the U.S. government owes. It represents the accumulation of past deficits, minus surpluses. Debt is like the balance on your credit card statement, which shows the total amount you have accrued over time.

Federal Surplus or Deficit Graph

The federal surplus or deficit chart explains the difference between the money Government takes in, called receipts, and what the Government spends, called outlays, each year. Receipts include the money the Government takes in from income, excise and social insurance taxes as well as fees and other income. Outlays include all Federal spending including social security and Medicare benefits along with all other spending ranging from medical research to interest payments on the debt. When there is a deficit, Treasury must borrow the money needed for the government to pay its bills.

The surplus is the amount by which the revenue of a government from taxes, tariffs and other sources exceeds its expenditures. A surplus means that the budget is likely healthy, at least in the short-term, and in any case the government does not have to resort to borrowing. The reason why surplus is good currently because our debt is quite high due to certain policies. Running a surplus means the government didn't use all the money it budgeted and therefore it can pay back its debts and borrow less.

Real Federal Surplus or Deficit Graph Adjusted for Inflation

In this chart the variable of real gross domestic product is the inflation adjusted value of the goods and services produced by labor and property located in the United States, and here it is shown according to the Consumer Price Index. The CPI is a measured by examining the weighted average of prices of consumer goods and services, such as transportation, food, and even medical care. CPI attempts to quantify the price level in an economy and measures the purchasing power of a country's unit of currency. The weighted average of the prices of goods and services that approximates an individual's consumption patterns is used to calculate CPI.

Used to measure inflation/deflation, the CPI is the most frequently used statistic for identifying periods of inflation or deflation. On my CPI chart any time the line is above zero it means the prices are going up and when the line goes below zero it is an indication of deflation. An inflation adjusted graph measures and reflects the value of all goods and services produced by the economy in any given year, expressed in dollars.

Federal Surplus or Deficit as a Percent of Gross Domestic Product

The Federal Surplus or Deficit as a Percent of Gross Domestic Product chart introduces the expenses exceeding revenue and indicate the financial health of a country. The government generally uses the terms budget surplus or deficit when referring to spending, rather than businesses or individuals. When a surplus occurs, revenue exceeds current expenses and results in excess funds that can be allocated as desired. In situations where the inflows equal the outflows, the budget is balanced.

GDP is the most commonly used measure of economic activity and serves as a good indicator to track the economic health of a country. Economic growth (GDP growth) refers to the percent change in real GDP. When GDP is low, it means that the total amount of goods and services that are being manufactured in the economy is less than the GDP of the previous year of the same economy. Budget deficits are reflected as a percentage of GDP. It may decrease in times of economic prosperity, as increased tax revenue, lower unemployment rates, and increased economic growth, in order to reduce the need for government-funded programs.

Federal Debt: Total Public Debt as Percent of Gross Domestic Product

The Federal Debt: Total Public Debt as Percent of Gross Domestic Product chart displays the comparison of a country's public debt to its gross domestic product (GDP). It is often expressed as a percentage. This ratio can also be interpreted as the number of years needed to pay back debt, if GDP is dedicated entirely to debt repayment.A high ratio means a country isn't producing enough to pay off its debt. A low ratio means there is plenty of economic output to make the payments.

As a country's debt-to-GDP ratio rises, it often signals that a recession is underway. That's because a country's GDP decreases in a recession. It causes taxes, and federal revenue, to decline at exactly the same time the government spends more to stimulate its economy. If the stimulus spending is successful, the recession will lift. Taxes and federal revenues will rise, and the debt-to-GDP ratio should level off.

Policy Basics

Where Does the Money Come From?

Taxes,taxes,taxes. The three main sources of federal revenue are individual income taxes, payroll taxes, and corporate income taxes. Other sources of tax revenue include excise taxes, the estate tax, and other taxes and fees. The federal government raises trillions of dollars in tax revenue each year, though a variety of fees. Some taxes fund specific government programs, while other taxes fund the government in general.

The money we pay to the Internal Revenue Service (IRS) as a percentage of the dollars we earn goes to funding the majority of what the government accomplishes. While your income tax alone might not seem like enough to do such significant work, combine the income tax of everyone who is working and you can see why this revenue source comes out on top.

What Has Happened to Corporate Taxes as Percent of Federal Revenues Over Time? Where Does the Money Go?

Individual income taxes make up a very large share of all federal tax revenues than corporate taxes do, in part because the wages and salaries of all Americans are much larger than profits of all U.S. corporations. The share of federal tax revenue paid by corporations has also declined substantially over time. While the official tax rate for most corporations is 35 percent, the effective tax rate (the percentage of profits), a corporation actually pays in taxes varies enormously from one corporation to the next.

Also, the federal government spends more money than it takes in from tax revenues. To make up the difference, the Treasury borrows money by issuing bonds. Anyone can buy Treasury bonds, and, in effect, lend money to the Treasury by doing so. In fiscal year 2015, the federal government is expected to borrow $583 billion to make up the difference between $3.18 billion in revenues and $3.8 trillion in spending. Borrowing constitutes a major source of revenue for the federal government.

What is the Federal Spending? What is Discretionary and Mandatory Spending?

Federal spending is the government's estimate of revenue and spending for each fiscal year. Like a budget, federal spending consolidates the expenditure of public funds for the upcoming fiscal year. The federal government's fiscal year begins on each October first.

Mandatory spending is spending required by statutory criteria, it is not authorized annually. Examples of mandatory spending include Social Security, Medicare, and Medicaid. Discretionary spending is spending that must be authorized annually and appropriated by the House and Senate. Some examples of areas funded by discretionary spending are national defense, foreign aid, education and transportation.