As raising the debt ceiling and cutting the deficit consume Washington, some people might wonder why the nation's fiscal problems have become so severe recently. Sure, the federal government spent some extra money over the past few years to try to combat the recession, but how did the national debt grow by nearly two-thirds in less than five years?
This shows the U.S. budget gap/surplus for the past two decades, as a percentage of GDP. The blue line is spending and the black line is tax receipts.
You can see that the deficit was growing in the early 1990s, but for a short time that changed. As the economy flourished in the late 1990s during the dot-com bubble, the higher Clinton-era tax rates brought in more money than the government spent, producing surpluses. In the 2000s, however, the era of surpluses abruptly ended and deficits made a comeback.
But check out the how the budget shortfall looked after the housing bubble popped. Expenditures rose in large part due to government stimulus efforts. They're only about half the story, however. At the same time, government revenue plummeted as indviduals and businesses' incomes dropped due to the recession.
And that's why the deficit got so far out of control. Spending skyrocketed and tax receipts plummeted. When you're buying more stuff, but have less money to pay for it, you dig yourself a very deep hole. That's what happened to the federal government, and now it's got to figure out a way to dig itself out.
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