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1 [1] (March 6, 2017)

handle is hein.crs/govcexr0001 and id is 1 raw text is: FF.~*\* gognko 'popmm- ' g-o g , q a X Updated March 6, 2017 Deficits and Debt Net deficits and debt are the primary short- and long-term measurements of federal budget performance, which represents a critical congressional responsibility. This In Focus summarizes debt, deficits, and their interaction at the federal level; analyzes recent outcomes and their interaction with the economy; and discusses Congressional options for debt and deficit management. The federal government incurs a budget deficit when total outgoing payments (outlays) exceed monies collected (revenues). If instead revenues are greater than outlays, the government incurs a surplus. Deficits are measured over the course of the fiscal year, which runs from October 1 through September 30. Net interest payments, which measure inflows and outflows on interest from the federal debt, are included in deficit and surplus outcomes. Federal debt represents the accumulation of government borrowing activity from private citizens, institutions, and domestic and foreign governments. Debt levels increase when there are budget deficits, net outflows for federal credit programs, or increases in intragovernmental debt (debt that is held in federal government accounts). The Department of the Treasury is tasked with managing debt levels, with the stated intent of doing so in a manner that maximizes transparency and minimizes interest costs. Policymakers monitor budget and debt outcomes for a number of reasons. Deficits and debt provide measurements of intergenerational equity, or how public goods and services and related payments are assigned across generations. Increases in debt and deficit levels in one time period may constrain the choices available to other periods. Budget and debt outcomes may have ramifications on performance in financial markets, as market exchanges may depend on the perceived credit risk of federal debt. Deficits and debt can also affect economic growth. In prosperous economic periods, deficit spending may replace private investment and, as those deficits will incur borrowing costs, can lower long-rn economic potential. Economic expansions are generally correlated with improvements in budget and debt outcomes. Net deficits typically experience a structural decline in periods of high economic growth due to both increased revenues (through a rise in earnings and subsequent tax payments) and reduced outlays (through a decline in demand for unemployment benefits and other income security programs). Reductions in outlays in an expansion may be mitigated by increases in net interest payments if the expansion is characterized by a rise in interest rates. When interest rates are low, net interest payments decline, and vice versa. As deficits have historically been the largest contributor to debt, the deficit improvements experienced in expansions indirectly reduce debt levels relative to poor economic periods. However, because debt is largely dependent on past federal fiscal outcomes, there may be a lag between a change in economic outcomes and changes in debt levels. Net deficit and debt levels may in turn affect economic outcomes. Many economists support the use of budget deficits as an economic stimulant during an economic downturn. Though deficit outcomes increase federal debt levels, they may also mitigate downward shocks in demand and employment in such periods. However, economic experts caution that structural deficits, which describe budget conditions that produce deficits in all economic conditions, may lead to adverse outcomes. Large and persistent deficit or debt levels may reduce public confidence in the government's ability to fulfill its borrowing obligations, which could increase federal borrowing costs and have implications for financial markets. There are past examples of foreign governments experiencing the adverse effects of a deteriorated fiscal position. There are, however, no examples of such an occurrence taking place in modem U.S. history. Figure I. Federal Debt, FY1940-FY2016 (As a % of GDP) Source: OMB, Historical Tables, Table 7.1 Notes: Shaded areas represent years with economic recessions. Figure 1 shows debt outcomes from FY1947 through FY2016. Deficits and federal debt levels reached their historical peak during World War II, as deficits as high as 29.6% of gross domestic product during the war caused federal debt to rise to 120% of GDP at the end of FY1946. (When comparing deficit and debt totals over time, measuring values as a percentage of GDP helps to account 'O 'T

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