The fiscal year is a one year period used by governments and companies for financial accounting and budgeting.  Fiscal deficits are negative balances that occur whenever a government spends more money than it brings in during the fiscal year. This negative balance or budget deficit is common in most governments, in fact, since 1970, there has only been 4 years where the U.S. government has NOT had a negative balance. In most recent years, the U.S. has shown a fiscal deficit of more than $1 trillion. 

Spending more money than you bring in is usually a recipe for disaster for any household, or business. How does this formula affect the economy of governments and countries that appear to make this a regular practice? 

When the government runs a budget deficit, it is said to be engaging in fiscal stimulus or spurring economic activity. The supposed purpose of this practice is to kickstart growth during a difficult economic period.  Increasing government spending can encourage economic activity through the following ways: 1) the  purchase of  additional goods and services from the private sector or 2)  indirectly by the transfer of funds to individuals who may then spend that money. Decreasing tax revenue tends to encourage economic activity indirectly by increasing individuals’ disposable income, which can lead to those individuals consuming more goods and services. The 2020 stimulus checks, increased benefits welfare, unemployment, etc, are examples of this type of increased government spending. The theory behind running on a fiscal deficit is that consumer spending and private investments will increase as more money is funneled back into the private sector. 

All deficits need to be financed. This is initially done through the sale of government securities. Individuals, businesses, and other governments purchase government securities such as Treasury bonds and lend money to the government. This type of financing has a direct impact on interest rates.  Fiscal deficit can lead to cost-push inflation.  The sale of government securities to finance fiscal deficits makes the government a competitor with other financial institutions who lend money. Financial institutions must pay a higher interest rate than the government on their investments in order to lure people away from government bonds. Higher interest rates increase production cost, which is passed on to consumers, thereby leading to higher prices. 

When the federal government runs large deficits, it lowers national savings, and thus also investment. The result is more consumption today, and slower economic growth and lower incomes in the future. As deficits and debt continue to grow, there is an increased risk that creditors will eventually demand a much higher premium to buy U.S. treasury securities. If that were to occur, interest rates on the debt would surge, benefits would be cut and taxes raised to cut deficits and restore investor confidence in the ability of the government to meet its obligations..

Keynesian Macroeconomics argue that fiscal deficits are necessary to stimulate the demand for goods and services. Other economists argue that deficits crowd out private borrowing and distort the marketplace. Finally, there is the argument that borrowing money (or increased government spending) necessitates higher taxes in the future; thereby unfairly punishing future generations to service the needs of the current culture. Ultimately, while fiscal deficits may have some short term benefits such as kickstarting a sluggish economy, over the long term, running on fiscal deficits as a regular practice can have serious consequences. No country can borrow forever without consequence. It defies common sense to believe the U.S. will be just as strong and secure in 30 years with a debt-to-GDP ratio that is double what it is today.

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