History of the Budget Deficit Since 1929

The budget deficit is currently extremely high and is at its highest in 7 years. The deficit has been a point of concern among politicians and the public for many decades. Whenever the deficit increases, the president is usually blamed regardless of how much impact they had in increasing the deficit. The US has a long but interesting history of dealing with deficits. Let’s take a look at the history of the deficit since the great depression.

First off, it’s important to note that looking at the raw deficit number may not be a good way to compare current deficits and past deficits. This is because the economy has become larger compared to the past, and larger economies tend to also generate more revenue, and can deal with larger deficits more easily. A country with a GDP of $30 billion will be crippled by a 100 billion dollar deficit, while a country with a GDP of $21 trillion, like the US, will be perfectly fine with it. In fact, a 100 billion dollar deficit for the US would be a major improvement from the current situation, in which the deficit is approaching $1 trillion. In order to account for the difference in the ability to handle a certain deficit number, we should use the Deficit/GDP measure to accurately compare deficits in the past to deficits today. In order to have a good idea of what this measurement means, it is important to see that the current deficit is 5% of GDP, and in 2009, during the great recession, the deficit was nearly 10% of GDP. 

Let’s start in 1929. Towards the beginning of the Great Depression, there wasn’t even a budget deficit. The government had a budget surplus, and was taking in more in revenue than spending. The deficit was -0.8% of its GDP in 1930. However, as the Great Depression got worse, and falling tax revenues combined with more government spending, the deficit increased. At the end of 1934, the deficit was 5.4% of GDP. This is shockingly at a similar level to today. As the decade went on, the deficit started to lower. By 1940, the deficit was only 2.8% of GDP. After that, the second world war started and this caused the deficit to skyrocket as the government needed to spend lots of money on the military. The deficit reached a peak in 1943, in which it was 26.9% of GDP. The deficit then started to lower afterwards. So much so that it turned into a surplus in 1948, and at that time, the deficit was -4.2% of GDP. 

In the 25 years that followed, the deficit stayed low and never went above 2.6% of its GDP. It also turned into a surplus from time to time. Under ford in 1975 and 1976, the deficit started to increase however. The deficit was 3.1% of its GDP in 1975, which is a lot considering the deficit was 0.3% of GDP in the previous year. In the next year, the deficit started to increase again, reaching 3.9% of GDP. After Jimmy Carter took office, the budget deficit was under control again. The deficit under Carter never went above 2.6%. However, when the Carter presidency ended, the US was in economic turmoil because of the energy crisis of 1979, which caused stagflation in the economy. This led to the next president, Ronald Reagan, enacting large tax cuts in order to attempt to stimulate the economy. These tax cuts along with increased defense spending under Reagan eventually led to a deficit that was 5.6% of its GDP in 1983, which was the highest since 1946. The deficit under Regan remained high until the final two years of his presidency, when the deficit in 1988 fell to 2.9% of GDP compared to 4.8% two years prior. Although the deficit under Reagan had finally got under control, his successor, George H.W. Bush, saw the deficit increase again under his presidency. By 1991, the deficit was yet again above 4% of GDP despite Bush raising taxes the previous year. This increased deficit was primarily due to the early 90s recession. The deficit would not be below 4% of GDP until Bill Clinton’s first year in office. 

Under Bill Clinton, the deficit began to lower again thanks to both parties working together in order to balance the budget. A combination of tax cuts, lower defense spending, and welfare reform during the Clinton administration led to the deficit being significantly lowered, and eventually being turned into a surplus. During Bill Clinton’s last year in office, the deficit was -2.3% of GDP. This was the lowest it had been since 1948. After Bill Clinton left office, the new president, Geroge W. Bush, launched a war on terror and increased military spending in his first term along with significantly cutting taxes. This caused the surplus to turn into a deficit again. By 2004, the US had gone to war with Iraq and the deficit was 3.4% of GDP. However, the deficit was then lowered to 1.1% of GDP by 2007. 

In 2008, the housing bubble burst and caused the economy to go down the drain, and this led to the biggest economic and financial crisis since the great depression. In the 2009 fiscal year, a combination of a $700 billion bank bailout signed by Bush, a $831 billion stimulus package signed by Obama, and falling tax revenue due to the recession led to a deficit that was 9.8% of GDP. This was the highest since world war 2. As the economy recovered, the deficit started going down again, primarily due to a large effort by the government to lower it. By 2015, the deficit was lowered all the way down to 2.4% of GDP. However, the following year, the deficit increased to above 3% of GDP, and when Trump became president in 2017, it kept increasing. By the 2019 fiscal year, the deficit was 5% of GDP. This was because of increased defense spending under the Republican government, and because of tax cuts enacted in 2017. 

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