Friday's announcement by the Biden administration was that the deficit for the fiscal year ending Sept. 30 was $360 Billion less than 2020. This is because a recovering economy helped to offset government spending on pandemic relief efforts.
Prior to the global pandemic that saw the deficit rise during two years, the largest deficit was $1.4 trillion in 2009. The United States was spending heavily at that time to help the country recover from a severe recession after the 2008 financial crisis.
The 2021 deficit is 12.4% of the GDP as a percentage of overall economic activity, measured by gross domestic product. This is a decrease from the 15% deficit in 2020.
The 2020 deficit was the largest in comparison to the overall economy, since World War II when it reached 29.6% GDP in 1943. This was because the United States borrowed heavily to finance war efforts. These figures were elevated to 22.2% GDP in 1944, and 21% GDP in 1945. They then began to decline once the war was over.
The joint Treasury and Office of Management and Budget report for 2021 stated that government spending rose 4.1% to $6.82 Trillion. The increase in government revenues, which rose 18.3% to $4 trillion, was offset. This revenue increase was due to an improving economy. Millions of people who lost their jobs during the pandemic returned to work, and corporate profits recovered after a terrible 2020.
"Under President Biden’s leadership, the U.S. Economy is getting back on track and Americans getting back to work," Treasury Secretary Janet Yellen and Shalanda Youth, acting director of Office of Management and Budget said in a joint statement.
According to the non-partisan Congressional Budget Office, the deficit is expected to fall below $1.15 trillion in the current fiscal year that began Oct. 1. It will then drop below $1 trillion for three consecutive years (2023-2025), before rising above $1 trillion each year through 2031.
The CBO forecast doesn't include spending that would occur if Biden can get two pending legislation through Congress: a $1 billion proposal for traditional infrastructure projects like roads and bridges, as well as his plan to boost the social safety net to combat climate change.
Safety-net measures were originally priced at $3.5 trillion, but it is likely to be reduced to $2 trillion or less in order to address the objections of moderate Democrats like Sen Joe Manchin from West Virginia.
Young and Yellen both credited Biden for reducing the deficit in their comments. They cited Biden’s economic policies as contributing to a lower budget, such as his "swift action" to mount a historic vaccine effort and his success in getting Congress approved $1.9 trillion more spending in the March stimulus bill.
Yellen stated that "while the nation's economic recovery has been stronger than other wealthy nations, it remains fragile." "To build on the progress made, Congress should approve President Biden's Build back Better plan."
Yellen and other administration officials argue that large deficits are a good way to increase economic growth and address long-term issues facing the middle class such as a shortage of child care. Yellen stated that efforts to address these issues will increase productivity over time and be cost-effective in a time where government borrowing costs are so low.
In 2021, the interest on the debt reached $562 billion. This is an increase of $40 billion over the previous year. The government had to pay Treasury securities holders higher returns due to rising inflation. The low interest rates have helped to keep overall debt payments stable, even as debt levels have increased. The total public debt is now around 100 percent of the GDP.
CBO projects that deficits will increase by $12.1 trillion over the next decade.
Congress approved a temporary increase in the debt limit from $28.88 trillion to $28.88 trillion earlier this month. This will allow Yellen continue to use extraordinary measures to avoid a default on the debt. This is something she warned would be disastrous and push the country into another recession.
Yellen stated that her maneuvering room would run out in December if Congress doesn't either increase the borrowing limit significantly or suspend it completely. To avoid a government shutdown, Congress must pass a budget plan or another stop-gap spending legislation by December 3.