What’s the Difference Between the Trade Deficit and Budget Deficit?
The terms “budget deficit” and “trade deficit” can be conflated, but they are distinct measurements of important fiscal and economic concepts.
The trade deficit measures the imbalance of imports relative to exports, while the budget deficit, also called the “fiscal” deficit, measures the imbalance of federal spending to federal tax receipts. The United States, in general, runs persistent deficits in both, importing more than we export and spending more than we collect in taxes.
For example, in fiscal year 2025, the United States ran a budget deficit of $1.8 trillion, as tax collections of $5.2 trillion fell short of the $7.0 trillion spent that year. The same period also saw a U.S. trade deficit of $1.0 trillion as the nation’s imports of $4.4 trillion exceeded its exports of $3.4 trillion.
What Is the Budget Deficit?
The fiscal deficit measures the imbalance between federal spending and federal revenues. Since 2002, the United States has run persistent annual budget deficits, which means for 23 years the United States has spent more than it has taxed — or put another way, has taxed less than it has spent. The largest sources of U.S. revenues are from individual income, payroll, and corporate taxes. Federal spending is devoted to a wide range of commitments including social programs such as Social Security and Medicaid, defense, and infrastructure. The budget deficit is financed through borrowing, and each annual deficit accrues to the overall national debt, which recently reached $38 trillion. America’s budget deficits are structural; according to the most recent projections, the budget deficit will average $2.2 trillion over the next decade, adding a cumulative $22 trillion to the debt.
What Is the Trade Deficit?
The trade deficit measures the balance of imports and exports between the United States and the rest of the world. Because the United States imports more than it exports each year, it runs a trade deficit. A country’s trade deficit is a result of many factors, such as trade policies, exchange rates, comparative advantages, and consumer preferences. The United States has incurred a trade deficit every year for nearly a half century.
How the Trade Deficit and Budget Deficit Interact
Though distinct concepts, the budget deficit and trade deficit tend to move in tandem and have an interactive relationship. For that reason, they are often called “twin deficits”. Budget deficits require government borrowing, which is typically financed, in part, by foreign investors. Currently, 32 percent of all U.S. debt is owned by foreign investors — approximately $9.1 trillion. Foreign investment through the purchase of U.S. debt reflects a demand for dollars that, all else equal, increases the value of the dollar. A stronger dollar makes exports relatively more expensive and imports relatively more affordable, which, in isolation, widens the trade deficit. The opposite is also true; as the dollar weakens, the trade deficit decreases because exports become less expensive and imports become more expensive. However, the value of the dollar and ultimately the trade balance are substantially influenced by broader economic forces.
Conclusion
The differences and interactions between the budget deficit and trade deficit are an important part of understanding the forces at play in the global economy.
U.S. trade flows with other countries reflect a complex mix of macroeconomic and microeconomic factors such as trade policies, exchange rates, comparative advantages, and consumer preferences.
Running a budget deficit, on the other hand, is a deliberate policy choice with clear risks. Right now, we are adding debt faster than ever due to a large structural imbalance between spending and revenue in our budget. Debt service costs — otherwise known as interest — have accelerated, rising to become the third-largest federal expenditure. Rapid accumulation of debt and debt service crowds out public and private investment, while current and future generations are stuck with the bill. The good news is that improving the budget deficit is entirely within the power of the elected leaders of the United States — there are many options available to close the deficit, and all that’s needed is leadership.
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Further Reading
The Federal Government Has Borrowed Trillions. Who Owns All that Debt?
Most federal debt is owed to domestic holders, but foreign ownership is much higher now than it was about 50 years ago.
The Fed Reduced the Short-Term Rate Again, but Interest Costs Remain High
High interest rates on U.S. Treasury securities increase the federal government’s borrowing costs.
What Types of Securities Does the Treasury Issue?
Learn about the different types of Treasury securities issued to the public as well as trends in interest rates and maturity terms.