When government revenues equal spending, a balanced budget exists. In reality, the federal budget is rarely balanced. A budget surplus occurs when annual revenues are higher than spending. A budget deficit occurs when spending is higher than revenues.
When the government runs a deficit, it must find a way to pay for the extra expenditures. It can either create money or borrow money. Covering huge deficits with created money can lead to hyperinflation, or very high inflation. The main way that government borrows money is by selling bonds, such as United States Savings Bonds.
When government borrows money, it creates a national debt, the total amount of money the government owes to bondholders. Two problems arise from a national debt. First, it reduces funds available for businesses to borrow and invest because people buy government bonds instead of investing in business. Second, government pays interest to bondholders, and money spent paying interest cannot be spent elsewhere.
In the 1980s, huge deficits led Congress to pass laws cutting federal spending. After the Supreme Court found many of these laws unconstitutional, some people suggested amending the Constitution to require a balanced budget. Opponents said an amendment would prevent government from dealing with rapid economic changes.
At the end of the twentieth century, budget surpluses occurred for the first time in thirty years. However, war, recession, and tax cuts soon brought new deficits.
