Why does the US federal debt increase by more than the US deficit each year?

Question

I was looking through the Historical Tables from the Office of Management and Budget (https://www.whitehouse.gov/omb/historical-tables/). I noticed that each year the debt increases by a different amount than the deficit. Why is this?

+------+---------------+---------------+---------------+
| Year | Gross Federal | Gross Federal | Deficit (From |
|      | Debt (From    | Debt          | Table 1.1)    |
|      | Table 7.1)    | Difference    |               |
+------+---------------+---------------+---------------+
| 2008 |     9,986,082 |               |       458,553 |
+------+---------------+---------------+---------------+
| 2009 |    11,875,851 |    +1,889,769 |     1,412,688 |
+------+---------------+---------------+---------------+
| 2010 |    13,528,807 |    +1,652,956 |     1,294,373 |
+------+---------------+---------------+---------------+
| 2011 |    14,764,222 |    +1,235,415 |     1,299,599 |
+------+---------------+---------------+---------------+
| 2012 |    16,050,921 |    +1,286,699 |     1,076,573 |
+------+---------------+---------------+---------------+
| 2013 |    16,719,434 |      +668,513 |       679,775 |
+------+---------------+---------------+---------------+
| 2014 |    17,794,483 |    +1,075,049 |       484,793 |
+------+---------------+---------------+---------------+
| 2015 |    18,120,106 |      +325,623 |       441,960 |
+------+---------------+---------------+---------------+
| 2016 |    19,539,450 |    +1,419,344 |       584,651 |
+------+---------------+---------------+---------------+
| 2017 |    20,205,704 |      +666,254 |       665,446 |
+------+---------------+---------------+---------------+
| 2018 |    21,462,277 |    +1,256,573 |       779,138 |
+------+---------------+---------------+---------------+

As you can see the increase in the debt is different than the deficit and tends to be greater.

I found this article from Forbes by Stan Collender that seems like it is relevant.

In it he says

But even though the budget only shows the expected losses, the government still has lend the full amount cash of the loans being extended. Stan Collender, Forbes

Later he says

That means the government must borrow the funds even though it doesn't need them to finance the deficit. Stan Collender, Forbes

If I understand this correctly Stan Collender is saying the US Government has to loan more money that in needs to cover the deficit. Why would the US Government borrow more than it needs to cover the US deficit? What determines how much the US Government borrows?

Answer 1

Table 7.1 includes both external debt and internal debt. Table 1.1 is the external deficit.

Internal debt means money that one part of the government owes to another part of the government. The largest portion of internal debt is the Social Security trust fund. Social Security usually takes in more money than it needs to pay current expenditures (2011 was an exception). It invests the remainder in US Treasury bonds. This Social Security surplus offsets some of the other government spending, reducing the external deficit. But it's still debt, just not borrowed from external sources.

The Social Security trust fund is not the only cause of differences, just the largest one. There are other trust funds, and there may be other categories that are included in 7.1 but not 1.1.

Callender says

That means the government must borrow the funds even though it doesn't need them to finance the deficit.

This is simply false. The government does need to borrow the funds (from the Social Security trust fund) to finance the general fund deficit. This hides the true size of the general fund deficit. To say otherwise is to claim that the Social Security trust fund does not actually exist. I.e. if you regard the Social Security trust fund as just an accounting gimmick and not a real debt, then you can of course offset the general fund deficit with the Social Security surplus. But that ignores the entire purpose of the trust fund, to build up a pool of money to compensate for the increased expenses associated with the retirement of the baby boomers.

His other point is more interesting, although his solution is questionable. What he's saying is that the federal government extends loans and guarantees other loans. It used to be that the extended loans were counted as part of the budget deficit but the loan guarantees were not. So to make the situation comparable, they stopped counting the extended loans in the budget deficit.

There was of course another solution. They could have counted both the extended loans and guarantees under the budget deficit. Then the treatment would have still been comparable. But there would not be this hidden debt.

The primary argument for the current system is that with an extended loan, most of the money will be paid back. So rather than paying off the government borrowing with general revenue, it will pay it off specifically with the proceeds from the underlying loan. And of course loan guarantees disappear as the underlying loan is paid off.

The problem is the term "expected losses". Not every loan will be paid off. So they have to mark those loan losses in the budget. They attempt to mark them as early as they can estimate them. But since those are estimates, they are subject to sudden change. For example, in the recession that started in 2007, a large number of the federally guaranteed or extended mortgages failed. This caused the budget deficit to balloon suddenly as failed loans suddenly moved on budget. If the loans had always been on budget, that risk would have been more visible before the recession when the government had more options to handle it.

Part of the problem here is that the current system mixes two budgeting methods. In one method, the capital accrual in the Social Security trust fund is included in the budget. In the other method, the capital costs of the loan and guarantee programs is not included in the budget. Either both should be on budget or neither. As stands, both make the budget deficit look smaller than it is, which is why there is such a large difference between the official deficit and the actual change in government borrowing.

Answer 2

First, it is important to know what, exactly, the national debt is mostly made up of: Treasury Bonds.

These bonds (also Treasury bills and notes) are essentially IOU's issued by the government which pay out interest. They are widely used for savings, as they pay out a return guaranteed by the US government.

Now, as the linked article explains, there are two main types of "borrowing" (issuing Treasury Bonds) that the government does which do not appear as part of the budget or deficit, but do add to the overall national debt.

The reason that these types of borrowing do not show up on the deficit or as spending is because of financial accounting legislation.

1. Special Government savings accounts or "trust funds"

Imagine that you borrow $1000 on your credit card, but you only spent $600 on actual stuff. Where could the other $400 gone? Into your savings account perhaps...

That is essentially what the government is doing with that added non-deficit debt. There are special savings accounts which are used to store money until they are needed to pay out mandatory benefits like Social Security and Medicare.

Everyone pays into the Social Security and Medicare funds through payroll taxes. Over the years, people have paid more into those funds than has been paid out (which is good- otherwise it would be a pyramid scheme).

That surplus money has to be invested in Treasury bonds. Hence, the government gets "loaned" money from these trust funds and gives the funds a Treasury bond which then pays out interest to add to the savings.

This interest is used to finance part of the yearly Social Security and Medicare payouts.

The government is not required to include the bonds issued to trust funds in the budget, so it doesnt show up there, but does add to the debt.

Fun fact: it is projected that by around 2035, the funds will have to start paying out from the capital in order to meet the required payouts, essentially becoming a ponzi scheme.

2. Loans made or guaranteed by the government

The government, besides borrowing money, also lends money to certain projects and local governments. They also guarantee loans (similar to how your parents might co-sign on your first car purchase).

If these loans go bad, the government has to eat up the loss of the failed loan. In the case of a direct loan, that means losing their capital. In the case of a guaranteed loan, that means paying out the value of the loan to the original lender.

Due to financial accounting legislation, the government is not required to report the full value of the loans as "spending" for the deficit. It is only required to report the expected losses from any loans or guarantees.

For example, the government might loan $1million, but only expect to lose $50,000, so the $50,000 figure is what gets reported on the budget.

However, to actually make these loans, the government still has to pay out the value requested. I.E if someone gets a $200,000 government loan approved, the government has to come up with $200,000 in cash to give to the loanee.

The way the government gets this cash is to borrow it, in the form of selling more Treasury bonds. So the government issues bonds, then uses that cash to give to someone receiving a government loan.

Since the government is not required to include the full amount borrowed in the deficit, the debt ends up increasing by more than the deficit.

Answer 3

The two have nothing to do with each other.

Trade deficit has to do with the extra goods and services the people of America buy from overseas, over the goods and services we sell overseas.

Federal budget deficit has to do with the Federal government spending more than it takes in, in the form of taxes

https://www.statista.com/chart/17281/us-trade-balance/

In fact if you look at the chart, you can clearly see, 2009 was a year where trade deficit sharply fell (because American consumers were in a severe tightening cycle), but that year the US Federal deficit surged to combat the financial crisis.

https://lh6.googleusercontent.com/P28ZmpjGqC5_r6lrh0rJmdcLN2_K8YuLkWXwuVi46pW1D61KnLboqERe6Xle84nZQdsrHqHVN7680y8hxKmAIfInGdl7Mw6eaF701sKVJ8_qPhv0enitOFSIzMVTZhyACA