The fiscal 2018 shortfall was the largest in six years, arriving as the Trump administration argued stronger growth would improve the nation’s finances. The numbers instead highlighted the gap between rising federal spending and revenue that failed to keep pace.
The U.S. federal government’s budget deficit surged to $779 billion in fiscal 2018, the U.S. Treasury Department reported on October 15, 2018. The shortfall rose $113 billion in one year, reaching its highest level in six years, as Donald Trump’s campaign promises that tax cuts and faster growth would strengthen federal finances faced a difficult test.
Donald Trump’s administration said spending growth was the main source of the widening gap. Critics of the tax law said the deficit showed that the administration’s argument—that tax cuts would pay for themselves through stronger economic growth—was not materializing, even as the economy expanded.
The $779 billion deficit
A deficit occurs when the federal government spends more in a fiscal year than it collects in taxes and other revenue. To cover that difference, the government borrows money, adding to the national debt.
For fiscal 2018, which ran from October 2017 through September 2018, the deficit reached $779 billion. That was up from the prior year and marked the biggest annual imbalance since fiscal 2012, according to the Treasury figures reported by PBS NewsHour.
The number was notable not simply because it was large. Deficits often rise sharply during recessions, when tax revenue drops and emergency spending increases. But this increase came during a period of solid economic growth and relatively low unemployment—the kind of conditions in which many budget analysts argue policymakers have more room to narrow deficits.
Revenue lagged behind spending
The basic arithmetic was straightforward: tax revenue was essentially flat in fiscal 2018 while federal spending rose 3.2%, according to the report. Congress had approved additional funding for both military and domestic programs.
That left the government borrowing more heavily to meet its obligations. Rising spending was therefore part of the story, and it was the factor emphasized by Treasury Secretary Steven Mnuchin.
In a statement, Mnuchin argued that the administration’s economic agenda had generated strong growth and said plans to reduce wasteful spending would put the United States on a more sustainable fiscal path. That position did not deny that borrowing had risen; it placed the greatest weight on expenditures rather than the tax changes.
The dispute was over more than blame. It was about whether stronger growth could generate enough additional tax revenue to compensate for lower tax rates and whether the federal government was moving toward, or away from, a manageable long-term debt path.
Tax cuts were the central test
Trump signed the Tax Cuts and Jobs Act in December 2017. The law was projected to reduce taxes by about $1.5 trillion over a decade, and the administration argued that a stronger economy would substantially offset the revenue loss.
Economic growth did accelerate in 2018. Federal Reserve officials anticipated growth of 3.1% that year, PBS reported. Yet the fiscal 2018 results did not show that faster growth stopping the deficit from rising.
Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, said the budget numbers made clear that faster growth was not preventing a larger deficit. William Gale, a senior fellow at the Brookings Institution, similarly argued that the tax cuts were unlikely to create a lasting boost large enough to solve the fiscal problem.
Those critiques did not mean tax policy alone caused every dollar of the increase. The budget reflects legislation enacted by Congress, mandatory programs, interest costs and annual spending decisions. Still, the tax law became the sharpest political point because it had been sold partly on the expectation that stronger growth would improve the government’s balance sheet.
Why a strong economy mattered
Economists often distinguish between a deficit used to cushion a downturn and one that grows while the economy is already healthy. During a recession, borrowing can finance unemployment benefits, stimulus measures and other support when private demand is weak.
In 2018, the concern was different. Critics said Washington had missed an opportunity to reduce borrowing before the next economic slowdown made deficits harder to control.
Gale argued that bringing down deficits during stronger economic periods can reduce the need for abrupt spending cuts later. It can also limit the buildup of debt that leaves policymakers with less flexibility in a future crisis.
The cost of financing debt was also rising. The yield on the 10-year Treasury note had climbed to roughly 3.15% from 2.46% at the start of 2018, according to the PBS report. Higher rates can mean higher federal interest costs over time, though borrowing costs move with broader financial-market conditions as well as government debt levels.
Long-term pressures did not disappear
The deficit debate was never solely about one tax law or one year’s appropriations. An aging population was expected to increase spending on Social Security, Medicare and other programs, adding to fiscal pressure in later years.
Those programs have broad public support, which makes changes politically difficult. That reality means deficit reduction usually requires tradeoffs: higher revenue, slower spending growth, changes to benefit programs, or some combination of all three.
The Trump administration’s mid-session budget review had already revised its expected deficits upward. It projected a deficit of $1.09 trillion for 2019, followed by $1.08 trillion in 2020 and $1.01 trillion in 2021, before projecting a modest decline below $1 trillion.
Forecasts are not guarantees. They can be altered by growth, inflation, interest rates, new laws and unexpected events. But the direction of the administration’s own projections undercut any suggestion that the 2018 deficit was a brief, self-correcting blip.
The promise behind the numbers
The fiscal 2018 report offered an early, concrete measure of a central Trump-era economic claim: lower taxes and faster growth would help produce healthier federal finances. At that point, the evidence showed growth had improved, but it had not offset the combination of tax reductions and higher spending enough to prevent a larger deficit.
Supporters of the administration could reasonably point to spending increases and argue that restraint in Congress was needed. Fiscal critics could reasonably point to flat revenue after the tax law and say the policy made the imbalance worse.
What was not in dispute was the immediate outcome. The United States borrowed more in fiscal 2018, its deficit reached $779 billion, and the gap was the widest in six years. The argument over the cause pointed to a larger unresolved question: whether elected officials would accept the tradeoffs required to bring spending and revenue closer together.
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