What Does The $1.75 Trillion Deficit Mean for You and Me?

President Obama recently presented a new federal budget plan to Congress that was a whopping $3.55 trillion (That’s $3,550,000,000,000!) dollars. The plan calls for increased spending for most federal agencies and programs, as well as some new budget priorities. There’s a specific layout of the budget available online at www.budget.gov. But what does this $1.75 Trillion budget deficit mean for us as consumers? It turns out, really not all that much.

Currently the US Federal Government has about $10.8 trillion dollars in debt, of which they pay approximately $350 billion in interest each year on. This means that $350 billion in paid-in tax dollars is not used to provide services for American citizens, but rather to pay interest on the national debt. An increase of $1.75 trillion to that amount would mean that there will be an additional $56 billion per year of tax-payer money would be going toward interest payments rather than toward providing for the nation’s defense, funding entitlement programs, and funding various social programs that the government has.

Since the government brings in approximately $2to $2.5 trillion per year depending on economic conditions from taxes. This $56 billion per year will now represent 2-3% of the total amount of revenue that the government has each year. Does that mean that $56 billion will be provided less in services to Americans? Probably not. Instead, the government will likely either increase taxes or borrow even more money to provide for these additional programs.

Although the dollar amount of the services provided by the federal budget will not decrease, there are other economic concerns that could affect consumers down the line. When a government’s federal budget deficit becomes too high of a percentage of the size of their gross domestic product (GDP), the value of the nation’s currency can drop because currency investors fear that said government will devalue their currency (i.e., print new money to pay off the debt).

Although the US Dollar has steadily declined in value over the last few years, so far it hasn’t been anything too concerning. Any change in the value of the dollar would likely be very gradual. There is some natural fluctuation in currency prices as well. In fact, the dollar’s exchange rate against the Euro and the British Pound has improved in the last year. A weaker dollar means that traveling overseas will become more expensive, that importing goods will be more expensive, but exports will likely increase as well, because individuals and businesses in other countries see American goods as “on sale.”

Finally, there is a possibility that if the US Government has prolonged, structural budget deficits, that the nation’s credit rating will fall. This would make it more expensive for the US Federal Government to borrow money (i.e., they would pay a higher interest rate). This means that more of tax payer dollars would have to go towards the interest on the national debt and taxes will have to increase accordingly or services will have to be reduced.

For us as individuals, there really won’t be any noticeable changes. Any negative effect from a massive budget deficit will be seen gradually and over the period of the next several years. Although the $1.7 trillion dollar budget deficit is the biggest it has ever been in the history of our nation, it still only represents 12% of the gross domestic product. This number is higher than economists would like, but it’s still less than what many other developed nations are borrowing as a percentage of GDP.