The U.S. budget deficit surged past the $1 trillion mark in February, less than six months into fiscal year 2025.
According to the Department of the Treasury, the federal government so far has spent a $1.15 trillion more than it has collected since October. That’s about $318 billion more than in the same span last year, roughly 38% higher, and a record for the period, per CNBC.
So, how does the national deficit affect you? Let’s take a look at several factors that have contributed to the deficit and how it can impact the finances of Americans.
Contributing factors to the US deficit
Although the specifics may differ from time to time, a budget deficit occurs when tax revenue is lower than the amount being spent. Why is there a gap between money that’s coming in and going out? The calculation is primarily influenced by policies set by the president and Congress. It can also serve as a reflection of the overall health of the economy.
If the economy isn’t doing so well, businesses and individuals typically aren’t earning as much. Or, businesses may invest less into their operations and cut costs, which could lead to stalled growth and higher unemployment. With lower incomes from individuals or businesses, less taxes are collected. And if government spending doesn’t change, it increases the chance of a deficit.
But even if the economy is doing well, policies or legislation that increase spending can still result in a deficit. During the COVID-19 pandemic, increased spending from policies that offered relief to families and businesses led to a higher amount of spending. Even though government revenue was high, the increased spending resulted in a deficit.
In fact, over the last 50 years, the government has operated on a surplus only four times, most recently in 2001.
This puts a lot of pressure on the way the government manages its finances. The U.S. Government Accountability Office (GAO) regularly audits the federal government’s financials. In an article posted Feb. 5, the GAO reported weaknesses at the management level that hindered the government’s ability to operate efficiently and address the country’s long-term financial health.
Some of these include financial management challenges at the Department of Defense, payment errors at several agencies and issues with supporting loan programs like ones through the Small Business Administration.
How the national deficit can impact your finances
The larger the deficit, the more likely the government needs to take on debt to make up for the shortfall, and like other borrowers the government needs to pay interest on its debts. According to the GOA, since 2017, the annual spending on net interest payments has more than tripled. To put it in perspective, in fiscal year 2024, more money was spent on net interest than national defense or Medicare.
If more revenue continues to be spent servicing debt, it could lead to drastic changes. Policies may be put in place to increase taxes or lower the amount of social services and subsidies currently available for Americans. But changes like these require government action, and you may not see this anytime soon.
In the meantime, preparing for rising prices is a smart move. Consider bolstering your emergency fund or padding your retirement savings, or finding ways to cut back in other areas to account for increased expenses.
Strategies to increase your income will help you to bear the brunt of any increased costs and make it easier for you to save and invest. Some best practices include negotiating a better wage with your current employer, finding a new job with a higher salary or working a side gig temporarily.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
