	Introduction

Persistent annual budget deficits and a large and increasing federal debt have generated discussions over the long-term sustainability of current budget projections. Federal budget deficits declined from 9.8% of gross domestic product (GDP) in FY2009 to 3.8% of GDP in FY2018. However, recent estimates forecast that the government will run deficits (i.e., federal expenditures will exceed revenues) in every year through FY2029. Federal debt totaled $21.516 trillion at the end of FY2018, and as a percentage of GDP (106.0%) was at its highest value since FY1947; $15.761 trillion of that debt (or 77.8% of GDP) was held by the public. The federal government incurs a deficit (also known as a net deficit) when its total outgoing payments (outlays) exceed the total money it collects (revenues). If instead federal revenues are greater than outlays, then the federal government generates a surplus. Deficits are measured over the course of a defined period of time—in the case of the federal government, a fiscal year. The federal debt is the money that the government owes to its creditors, which include private citizens, institutions, foreign governments, and other parts of the federal government. Debt measurements may be taken at any time and represent the accumulation of all previous government borrowing activity. Federal debt increases when there are net budget deficits, outflows made for federal credit programs (net of the subsidy costs already included in deficit calculations), and increases in intragovernmental borrowing. Comparing Debt Held by the Public and Intragovernmental Debt

Federal debt may be divided into two major categories: (1) debt held by the public, which is the sum of accrued net deficits and outstanding money from federal credit programs; and (2) intragovernmental debt. Deficit and Debt Interaction

Federal deficit and debt outcomes are interdependent; budget deficits increase federal debt levels, which in turn increase future net deficits because of the need to service higher interest payments on the nation's debt. The nature of the relationship between deficits and debt varies depending on the type of debt considered. How Deficits Contribute to Debt

Budget deficits are the principal contributor to debt held by the public. To finance budget deficits, Treasury sells debt instruments. Publicly held debt contributes directly to federal deficits through interest payments on debt issuances. Debt holders are compensated for those costs by receiving interest payments from Treasury on their issuances. How Deficits and Debt Contribute to the Economy: Long-Run Effects

In the long run, when economic output is affected by supply-side choices, the effect of government borrowing on economic growth depends on how amounts borrowed are used relative to what would have otherwise been done with those savings (i.e., an increase in private investment or net exports) if such borrowing had not taken place. Federal debt issuances represent an increase in the current level of federal resources and a decrease in future federal resources. Total borrowing is constrained by the money available for investment (savings in dollars) at a given point in time. This limit means that the amount of federal debt relative to output cannot increase indefinitely.
The federal government incurs a budget deficit when its total outgoing payments (outlays) exceed the total money it collects (revenues). If instead federal revenues are greater than outlays, then the federal government generates a surplus. Deficits are measured over the course of a defined period of time—in the case of the federal government, a fiscal year.
Debt measurements may be taken at any point in time, and represent the accumulation of all previous government borrowing activity from private citizens, institutions, foreign governments, and other parts of the federal government. Federal debt increases when there are net budget deficits and outflows made for federal credit programs, which combine to represent debt held by the public. Federal debt also rises through increases in intragovernmental debt, which is generated by trust fund surpluses that are used to finance other government activity. Federal debt declines when there are budget surpluses, a reduction in the federal credit portfolio, or decreases in intragovernmental borrowing.
Federal deficit and debt outcomes are interdependent: budget deficits increase federal debt levels, which in turn increase future net deficits. The nature of the relationship between deficits and debt varies depending on the type of debt considered. Budget deficits are the principal contributor to debt held by the public. The effect of deficits on intragovernmental debt is less certain than their contribution to debt held by the public. All else equal, increases in net trust fund deficits will lead to increases in total budget deficits but decreases in intragovernmental debt.
Interest payments made on publicly held debt instruments contribute directly to federal deficits. Holders of federal debt are compensated by receiving interest payments from Treasury. Intragovernmental debt does not contribute to future deficits.
Persistent budget deficits and a large and increasing federal debt have generated discussions over the long-term sustainability of current budget projections. Federal budget deficits declined from 9.8% of gross domestic product (GDP) in FY2009 to 2.4% of GDP in FY2015, and subsequently increased to 3.8% of GDP in FY2018. Recent estimates forecast that the government will run deficits in every year through FY2029.
Federal debt totaled $21.516 trillion at the end of FY2018, which as a percentage of GDP (106.0%) was its highest value since FY1947; of that debt, $15.761 trillion (or 77.8% of GDP) was held by the public.
Over time, persistent budget deficits can hamper economic growth. Deficits represent an intertemporal transfer from later generations to the current one, as money borrowed now will eventually require repayment with interest. The effect of deficit financing on economic output depends on the nature of the government activity being financed and the private activity that would have otherwise taken place.
Federal debt is constrained by the willingness of investors to finance borrowing. While the amount of federal borrowing investors will finance may be affected by economic growth and other factors, real federal debt cannot increase indefinitely. There are no signs that federal borrowing capacity will be exhausted in the short term. However, the consequences of exhausted fiscal space may be worth considering when examining the medium- and long-term trajectory of the federal budget.