Most likely, the national debt will rise—the government has to borrow when federal spending outpaces revenue.
What happens if the federal government runs a budget deficit?
The government will sell more Treasury bonds to cover the gap between what it spends and what it collects in taxes.
The Treasury doesn’t have much choice here. When tax revenue dips below spending—like during recessions or big spending pushes—it issues extra bonds to investors, foreign governments, and even regular folks. According to the U.S. Treasury, this keeps piling onto the national debt, which sat near $34 trillion in early 2026. And here’s the kicker: if deficits keep growing without revenue catching up, interest payments on that debt will eat up more of the budget every year. That’s money that can’t go toward schools, roads, or defense.
How does the U.S. finance budget deficits?
By issuing government bonds that investors buy—think Treasury bills, notes, and bonds with different maturity dates.
These aren’t just IOUs handed to a single bank. The government auctions them off to a mix of buyers: banks, pension funds, foreign governments like Japan and China, even individuals holding TreasuryDirect accounts. As of 2026, about 70% of U.S. debt is in public hands, while the rest stays within federal trust funds and other government accounts. The Treasury adjusts how much it sells based on how big the deficit is—like in 2025, when a $1.7 trillion shortfall meant roughly that much in new debt hit the market. Large deficits can also influence broader economic systems, such as market competition and private investment.
Where does the money come from to cover a budget deficit?
The Treasury issues new U.S. Treasury securities—bills, notes, bonds—to make up the difference.
These aren’t just printed overnight. The Treasury holds regular auctions where big institutions and even small investors can buy in. The total amount sold matches the size of the deficit. For example, a $1.7 trillion deficit in 2025 meant about $1.7 trillion in new debt floated out into the market. It’s not free money—it’s borrowed, with interest attached. Over time, this borrowing can shape how governments structure their financial systems, similar to historical administrative models seen in colonial governance.
What usually happens when the government runs a deficit?
The national debt grows—every deficit adds to what the country already owes.
Think of it like a credit card balance that never gets paid off. The Congressional Budget Office tracked this closely: from 2020 to 2026, debt held by the public jumped from $21 trillion to about $27 trillion. Sure, deficits can juice the economy in tough times, but they also mean bigger interest bills down the road. That leaves less room for other priorities—like education or infrastructure—unless policymakers act.
What does it mean when a country runs a fiscal deficit?
It means the government is spending more than it earns from taxes and other income over a set period.
This isn’t rare. The U.S. has run deficits during recessions, wars, or massive spending bills—like the COVID-19 recovery. On the upside, pumping money into the economy can boost demand and keep people employed. But if it goes on too long, borrowing costs can climb, inflation can flare up, and the country’s credit rating could take a hit. Economists usually look at deficits as a share of GDP to see if they’re sustainable—or if they’re becoming a long-term problem.
Which part of the budget gets bigger when the federal government runs a deficit?
The national debt grows—it’s the total pile of what the government owes, not just the yearly shortfall.
A $1 trillion deficit in one year adds roughly $1 trillion to the debt. By 2026, the U.S. debt-to-GDP ratio hit about 122%, according to the CBO. That’s a level usually seen only during major wars. The difference between deficit and debt matters: the deficit is the yearly gap, while the debt is the running total. And that total keeps climbing unless something changes. To understand how different systems contribute to debt accumulation, explore types of government and their spending approaches.
Who ends up holding the money the U.S. government owes?
A wide mix of lenders—U.S. citizens, banks, pension funds, foreign governments, and even the Federal Reserve—all hold Treasury securities.
As of 2026, Japan holds the largest foreign stake, followed by China. Domestically, individuals, mutual funds, and the Fed itself are major holders. The Treasury releases a monthly breakdown so everyone can see who’s financing Uncle Sam. It’s not a secret—just a very big, very public debt ledger.
Why do governments end up spending more than they collect?
Usually because spending outpaces tax revenue—think recessions, wars, big infrastructure bills, or entitlement programs.
Sometimes it’s intentional stimulus. Other times it’s unavoidable—like during a pandemic or a financial crisis. Now, interest payments on existing debt are eating up about 10% of federal spending, which makes deficits even harder to shrink when rates are high. To fix it, policymakers can raise taxes, cut spending, or grow the economy to bring in more revenue. But none of those are easy choices.
What keeps growing when the government runs continual deficits?
The national debt keeps rising—every year’s deficit adds to the total.
Imagine writing a check every year for $1.5 trillion more than you earn. That’s what continual deficits look like. The CBO projects that under current policies, the debt could top $50 trillion by 2036. That’s driven by healthcare costs, Social Security, and rising interest payments. The longer deficits go unchecked, the harder they are to reverse—and the more of the budget gets locked into paying interest instead of services.
What’s the ripple effect of a bigger budget deficit?
The Treasury has to sell more bonds, which can push interest rates up and make borrowing more expensive for everyone.
More bond sales can drive bond prices down and yields up, which means higher mortgage rates, steeper business loans, and pricier credit cards. Between 2025 and 2026, the Federal Reserve watched this closely to guide its policies. Over time, large deficits can “crowd out” private investment—businesses and homebuyers face higher costs, which can slow long-term growth. It’s not just a government problem; it affects Main Street too. For more on how borrowing costs impact broader economic activity, see crowding out effects.
What’s the realistic way to shrink the budget deficit?
You need to either bring in more revenue—through higher taxes or stronger growth—or cut spending.
Policymakers love debating ideas: raise the payroll tax cap, close corporate tax loopholes, trim defense budgets, or reform entitlements. The CBO says combining tax hikes and spending cuts equal to 1% of GDP each year could stabilize the debt-to-GDP ratio by 2035. But here’s the catch: any plan has to avoid crippling the recovery or gutting essential services. It’s a tightrope walk, not a quick fix.
What’s the government’s next move when it runs a deficit?
It has to borrow by issuing Treasury bonds to cover the shortfall—that’s the only way to keep paying the bills.
The Treasury structures these sales across different maturities to match what investors want. Sure, deficits are common—even expected during tough times—but if borrowing stays too high, interest costs spiral. The Treasury tries to balance flexibility with stability, sometimes tweaking auction sizes or rolling out new bond types to keep demand steady. It’s not glamorous, but it keeps the government running.
What do we call it when a government spends more than it earns?
That’s a budget deficit.
In 2025, for example, the federal government spent $6.4 trillion but only brought in $4.7 trillion in revenue—that left a $1.7 trillion hole. Deficits aren’t always bad—especially in crises—but if they become the norm without a plan to fix them, that’s when trouble starts. Persistent deficits can erode confidence, raise borrowing costs, and limit future options.
What’s the size of the current federal deficit?
As of June 2026, the federal deficit is about $1.8 trillion year-to-date.
Total debt held by the public sits around $28.5 trillion, and the CBO expects annual deficits to hover between $1.6 and $2 trillion through 2030—unless Congress changes course. These numbers come from the CBO’s spring 2026 projections. For the freshest numbers, check the CBO report or the Treasury’s Fiscal Data site. They update in real time, because this stuff changes fast.
How does a budget deficit actually affect the economy?
In the short run, it can boost growth by putting more money into the economy—but over time, it may lift interest rates and inflation.
During recessions, deficits act like a financial cushion—they help keep people employed and businesses afloat. But if deficits stay large for years, the national debt balloons, interest payments climb, and future spending gets squeezed. The Federal Reserve watches this closely to avoid overheating the economy or letting inflation spiral. The real impact depends on what the deficit pays for: productive investments can pay off, but just propping up day-to-day spending? That’s a different story.
