This is bad, and there is no reason to believe it will change anytime soon. Yet neither party is talking seriously about bringing federal spending in line with federal revenues.

As official Washington ignores the deficit, ordinary Americans need to brush up on the topic, because every time Uncle Sam spends a dollar he doesn’t have, he’s placing a burden on consumers of today and the homeowners and taxpayers of tomorrow.

What is the deficit and why does it matter?

The federal deficit is easy to confuse with the national debt, a related but different measure. Both the deficit and the debt are very big numbers measured in trillions of dollars. Both reflect overspending by the federal government.

And the deficit causes the debt.

Consider the analogy to an individual consumer: If he spends more in a month than he earns, that excess spending is his monthly deficit. If he doesn’t have savings on which to draw, he must borrow — say, run up credit card debt. Every month in which he overspends, running a deficit, he necessarily adds to his mountain of personal debt.

If he ever runs a surplus (earning more than he spends), he can pay down some of that debt — which would be a good idea, because he’s paying interest every month on that debt.

Instead of a credit card, Uncle Sam funds his excess spending by selling Treasury Bills, Treasury Notes, Treasury Bonds, and some other financial products. Banks, insurance companies, and other investors are the typical buyers of Treasuries, which is to say they are the lenders to Uncle Sam. Regular Americans also buy Treasuries. Foreign governments and companies also own billions in U.S. debt. Everyone who buys a Treasury is lending money to the federal government.

To finance July’s $432 billion shortfall, for instance, the federal government sold about $361 billion in Treasuries, and used other means (including spending down some operating cash) to cover the other $70 billion.

Currently, about $38.9 trillion in Treasuries is outstanding, which is to say, the national debt is $38.9 trillion. But about $7.7 trillion of that is money that one part of the federal government loaned to another part, and so the rest is the “debt held by the public” — the debt that future taxpayers will have to pay — which is currently is around $32.1 trillion.

Last month, the federal government paid $104 billion in interest on that debt. By the time the fiscal year is over, we will have spent $1 trillion on interest payments on the debt.

That is, the deficit is a problem not only because deficits create problems, but because deficits add to the debt, which creates problems.

For starters, deficit spending causes inflation. When the government spends more than it takes in, the government is actually increasing the amount of the money in circulation. That July $432 billion in extra spending didn’t cause $432 billion in new goods and services to appear, it largely resulted in more money chasing the same amount of goods and services — and that is the recipe for inflation.

Also, there’s the threat of a debt spiral. Last year, our economy grew by $1.5 trillion (from a GDP of $29.3 trillion to $30.8), which exceeded the $1 trillion in annual interest payments. But as we continue to run annual deficits, that interest tab will grow, and soon our interest payments will exceed our economic growth. At that point, we are financing our borrowing costs entirely with more deficit spending, which is a like entering a gravity well of debt.

How did it get so big?

The U.S. government ran a surplus in fiscal year 2001. Now it is running a $2 trillion deficit and nearly 30% of all of our spending is covered by borrowing.

How did the deficit get so big?

Democrats will blame tax cuts under Presidents George W. Bush or Donald Trump. Republicans will blame overspending by Big Government liberals. Both of these answers are incomplete.

For one thing, Republicans are no less profligate on spending than are Democrats. (The only time spending growth is constrained is when a Democratic President is working with a Republican Congress.)

Also, while tax cuts this century have reduced federal revenues, and thus increased the deficit, the historical evidence suggests that different tax regimes don’t do much to squeeze revenue out of the economy.

Since the end of World War II, federal revenue has been equal to about 16% of GDP. It has never hit 20% and it fell below 15% only once, during the 2008-2009 financial crisis. Since 2019, when the Tax Cuts and Jobs Act was fully implemented, federal revenues have averaged 16.82% of GDP, basically the same as the post-war average of 16.81%.

If we returned taxes to 2001 levels (about 19% of GDP) without harming the GDP, we could bring in maybe an extra $700 billion a year, reducing the deficit by one third.

On the spending side, the problem is also not what most people think. Go back to our balanced budget in Fiscal Year 2001: The federal government spent $1.835 trillion, of which about $640 billion was “discretionary spending” — spending approved by Congress in the annual appropriations process. The rest was “mandatory spending” prescribed by earlier laws, including $422 billion on Social Security and $220 billion on Medicare.

Adjust those 2001 numbers for inflation, and that would be $800 billion (Social Security) and $420 billion (Medicare) in today’s dollars.

In Fiscal Year 2025, the federal government spent more than $7 trillion, including $1.38 trillion on Social Security and $955 billion on Medicare. That is, these old-age entitlements have nearly doubled, even when accounting for inflation. The growth rate in these two items, combined with our interest payments, add up to nearly the entire annual deficit.

Politicians often blame overspending outside of Social Security and Medicare for the deficit. Surely, military and domestic spending has grown unchecked, but the other popular villains here are relatively tiny.

During the Biden Administration, foreign aid was historically high, averaging almost $90 billion a year, with Israel and Ukraine receiving the bulk of it. That is, every month of Social Security benefits costs more than a year of foreign aid when foreign aid was at its peak.

To fix the deficit, we need to fix Social Security and Medicare.

Can we fix it?

Of course, fixing Social Security and Medicare isn’t easy politically.

Social Security has been presented as something other than a government benefit, but rather an insurance product or even an investment account: You pay into Social Security through your payroll taxes, the government tells you what benefit you’ve earned through your work, and then you get “your” money back out in retirement.

If Congress were to cut Social Security benefits, millions of working adults would object almost as if Congress had just dipped into their retirement accounts.

But if we don’t cut Social Security and Medicare, we cannot close the deficit. If Congress left Social Security and Medicare alone, it would need to cut more than 50% of the entire rest of the budget — including national defense — to balance the budget.

SOCIAL SECURITY INSOLVENCY IS HERE

Closing the deficit will realistically require significant cuts to Social Security benefits, some tax increases, and significant cuts to discretionary spending.

Currently, workers do not pay Social Security tax on any income over $184,500. Many liberals and some conservatives want to abolish that cap or raise it higher. Also, individuals who have worked more than 30 years and earn high incomes can receive over $4,000 a month in Social Security. There’s a case for making those larger benefits less generous.

Again, both of these changes would be very unpopular. The alternatives, though, is a growing deficit, leading to a burgeoning debt. The consequences of that won’t be popular, either.