IndiView Chart of the Week – Budget Deficits

As many of you know, the U.S. budget bill passed in early July. While the bill impacts tax policy (mostly stable or slightly lower rates) and programs like Medicaid (more barriers, aiming to reduce spending), this update will focus on one thing: the estimated budget deficit.

The chart below, from the Congressional Budget Office (CBO), published in January 2025, shows actual and projected federal deficits as a percentage of GDP from 1975 to 2035.

As shown, the U.S. has mostly run budget deficits since 1975, with a brief surplus in the late 1990s. Since then, deficits have returned and the average level of deficit spending as a percent of GDP has increased.

Normally, I say charts that go up and to the right are a good thing—this is not one of those cases. While projected deficits may ease slightly from current levels, they remain elevated and persistent.

Why Reducing Deficits Matters

High, sustained deficits require more borrowing, which adds to the national debt. This creates ripple effects:

• Higher interest costs: More of the federal budget is used to pay interest, crowding out spending on other priorities.
• Reduced capacity to invest: Funding for infrastructure, education, and R&D gets squeezed.
• Less room to respond to crises: Deficit levels limit emergency response capacity during shocks like COVID.
• Risks to long-term growth: High debt can push rates higher, reduce dollar stability, and lower private investment.

How Can the U.S. Reduce Deficits?

• Increase taxes: While this boosts revenue, it’s politically unpopular. Tax policy has generally trended lower.
• Cut spending: Popular in theory, but the chart below shows just how much spending goes toward well-liked programs—cuts are politically difficult.

• Promote GDP growth: Long-term growth through infrastructure, innovation, and workforce development can help—but benefits take time and require upfront investment.
• Allow modest inflation: Inflation erodes fixed debt in real terms. But too much can hurt savers, raise interest rates, and disrupt spending behavior.

Returning back to the July budget bill – the Congressional Budget Office has not commented (yet) on the final bill.  Both the house and senate bills, however, were analyzed and the budget office reflected that both were likely to INCREASE, not decrease, national debt. Therefore, the US budget just passed does not improve, and likely worsens, the situation above.

What Should Investors Do?

• Raise personal savings rates: Government safety nets may become less reliable. Favor disciplined budgeting and long-term investing.
• Diversify by product and geography: Spread investments across asset classes and international markets to reduce exposure to U.S.-specific risks.
• Be time- and tax-efficient: Align allocations with your goals and time horizons. Time-based strategies allow for protection to meet near-term needs while still building for the future. Tax-efficient strategies allow you to keep more of what you earn.

By focusing on what you can control, you become less reliant on outside forces (ie: government) to achieve your mission.

Want to learn strategies to accomplish this?  Contact us 

Source: https://www.cbo.gov/publication/61135