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The federal deficit is a measure of the difference between revenues collected by the government and the total amount spent in a fiscal year. However, another metric — the primary deficit — can also offer important insights when evaluating the government’s fiscal condition.
The primary deficit excludes interest payments, thereby measuring the gap between all other spending and total revenues collected. In this way, the primary deficit offers a slightly different perspective, shedding light on the structural imbalance between how much money our government brings in each year (mostly through taxes) and how much it costs to provide government services.
The federal government frequently runs primary deficits. Over the past 50 years, annual federal revenues have equaled or exceeded non-interest expenditures — creating a primary surplus rather than a deficit — only 15 times. In the other 35 years, debt was issued to cover the gap. According to the Congressional Budget Office’s (CBO’s) projections, primary deficits will remain a consistent feature of the federal budget if current policies stay in place, with non-interest expenditures exceeding revenues by $4.4 trillion (1.7 percent of gross domestic product, or GDP) over the next 10 years.
Under current law (which includes the expiration of tax reductions for individuals and large funding cuts next year), the primary deficit will remain close to 2 percent of GDP over the next 10 years. With primary deficits expected to continue in the years ahead, mounting interest costs will make the total deficit larger over time.
Because of the considerable amount of debt that has already been accrued by the federal government — and the interest that will need to be paid on such debt — it is important to address the existing imbalance between non-interest spending and revenues. Without doing so, it will be difficult to stabilize the total deficit even if economic conditions remain favorable.
Many analysists and economists point out that when the primary deficit is low and interest rates are lower than the growth rate of nominal GDP, we will see a reduction in the debt-to-GDP ratio. However, with the primary deficit currently around 2 percent of GDP and projected to remain around that level — and with interest rates anticipated to rise over the next few years — our debt will continue to grow faster than our economy. If the tax increases currently scheduled for the coming years do not take place, CBO estimates the national debt could climb to as high as 105 percent of GDP by 2029, higher than any point since the years following World War II.
If the federal government cannot more closely align its revenues and expenditures, the national debt will continue to rise at an unsustainable rate and could jeopardize the country’s economic future. Fortunately, many solutions are available that could put the budget on more stable footing.