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To evaluate the government’s fiscal situation, analysts typically reference the total deficit — the gap between total federal spending and revenues. However, another measurement — the primary deficit — focuses on the difference between government revenues and spending, excluding interest payments. By excluding debt service, the primary deficit highlights the underlying structural imbalance between the amount of money that the federal government brings in each year (mostly through taxes) and how much it costs to provide government goods and services.
The federal government has run a total deficit almost every year over the past five decades; total annual spending since 1971 has exceeded total revenues by more than $357 billion on average, and that gap is expected to continue growing in the future. Even without accounting for interest payments, federal spending has frequently outpaced revenues — causing the government to run primary deficits. Over the past 50 years, annual federal revenues have equaled or exceeded non-interest expenditures only 13 times. In the other 37 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. Non-interest expenditures spiked in 2020 due to the government’s response to the coronavirus (COVID-19) pandemic; however, even as the pandemic wanes, CBO projects that annual non-interest spending will continue to exceed revenues by substantial amounts — by nearly $8 trillion (3 percent of gross domestic product, or GDP) over the next 10 years.
Interest costs fell in 2020 and are expected to continue falling through 2023, as interest rates have dropped during the recent economic slowdown. As a result, interest costs are a relatively small contributor to the total deficit this year. However, CBO projects that rising debt and higher rates in the future will cause interest payments to more than double by 2031. Mounting interest costs will make the gap between the primary and total deficit widen 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 will be important to address the existing imbalance between non-interest spending and revenues when the public health crisis has abated.
Many analysts and economists point out that when the primary deficit is small and interest rates are lower than the growth rate of nominal GDP, the debt-to-GDP ratio will fall. However, with the primary deficit projected to average 3 percent over the next decade — and with interest rates anticipated to rise later in the 10-year period — debt will continue to grow faster than our economy. CBO estimates that debt held by the public will climb to 107 percent of GDP in by the end of 2031, higher than any point in the nation’s history.
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 to address our fiscal situation.