The U.S. government spent $984 billion more than it collected in taxes and fees in fiscal year 2019, the Treasury Department said Friday.
That represents a 26 percent increase over last year’s $779 billion budget deficit.
When spending exceeds tax collections, as it has every year since 2002, the U.S. government borrows the difference. Interest rates on Treasurys have plummeted this year, suggesting that investors in the U.S. and abroad are eager to buy U.S. debt. A year ago, the yield on the 10-year Treasury was around 3.2 percent. It has since fallen to around 1.8 percent.
Higher spending pushed up the so-called budget deficit despite rising tax revenues. Government spending climbed 7.3 percent, to $4.4 trillion. Tax revenues climbed 3.9 percent, to $3.46 trillion, according to a report released by the Treasury Department Friday.
That brought the fiscal deficit to just under a trillion dollars for fiscal year 2019, which ended on September 30. A month ago, the fiscal deficit was running higher than $1 trillion. It fell in September because, as is typical in the final month of the fiscal year, the government collected more in taxes for the month than it spent.
Taxes subtract spending power from households and businesses, while government spending adds to overall demand–albeit often in ways that are very different from how the private sector would have spent the funds. When the government runs a budget deficit, it is essentially replacing demand subtracted from the domestic economy by spending that goes to buy imported goods and by Americans who save a portion of their income.
Some economists argue that higher deficits can cause households to increase their savings in anticipation of higher taxes to pay off the federal debt incurred. But the evidence for this is mixed at best. It seems unlikely that household savings decisions are actually driven by concerns that someday taxes might be higher because government deficits have increased.
What’s more, at least in recent decades, deficits do not appear to lead to higher tax rates. Deficits rose to record highs during the Obama administration, topping $1 trillion for the first time ever. But instead of rising under dollar Trump, taxes on households and businesses were cut.
The main economic danger posed by budget deficits is thought to be inflation, essentially the government driving prices up by competing with the private sector for resources. Data on inflation, which has failed to rise as high as the Fed’s 2 percent target, suggest that the recent rise in budget deficits poses no inflationary threat.
Deficits, particularly when interest rates are very low, may encourage the government to spend more, raising the risk of too much government intervention in the economy or wasted resources. Studies have shown that when households are made to pay for spending in the form of higher taxes, they are more likely to resist spending measures by voting for politicians who promise to rein in government. Deficits, because they rely on voluntary investment by savers rather than coerced taxes, appear to have the opposite effect.
In past years, high deficits have led to high stakes political showdowns and budget agreements aimed at cutting spending, increasing revenue, or both.