Impact of Budget Deficits on U.S. Economic Policy: 2020–2025

by admin April 25, 2025 578 9 min read

A budget deficit occurs when government expenditures exceed revenues, requiring borrowing or other financing methods to cover the shortfall. In the United States, budget deficits have significantly shaped economic policy from 2020 to 2025, particularly in response to the COVID-19 pandemic, economic recovery efforts, and looming tax policy changes. This article explores how deficits have influenced fiscal and monetary policies, tax administration, and long-term economic strategies, with data from government sources, a summary table, and a chart illustrating deficit trends.

Understanding Budget Deficits and Economic Policy

A budget deficit, defined as the excess of government spending over revenues, forces policymakers to make critical decisions about financing, spending priorities, and revenue generation. In the U.S., deficits are measured as a percentage of GDP, with higher ratios signaling greater fiscal strain. Deficits can stimulate economic growth by increasing aggregate demand but risk inflation, higher interest rates, and crowding out private investment if mismanaged. From 2020 to 2025, U.S. budget deficits have driven changes in tax policy, IRS enforcement, and debt management, reflecting both short-term crisis responses and long-term fiscal challenges.

[](https://en.wikipedia.org/wiki/Budget_deficits)[](https://1prime.ru/20230725/841156915.html)

2020–2021: Deficit Spending to Counter the Pandemic

The COVID-19 pandemic triggered unprecedented deficits as the U.S. government implemented massive relief programs. In fiscal year 2020, the federal deficit reached $3.1 trillion (14.9% of GDP), the highest since World War II, driven by the CARES Act and subsequent legislation. These laws funded Economic Impact Payments ($1,200–$1,400 per individual, totaling $391 billion), expanded unemployment benefits, and the Paycheck Protection Program, which provided $525 billion to small businesses. The American Rescue Plan Act (ARPA) of March 2021 added $1.9 trillion in spending, including an expanded Child Tax Credit (CTC) of up to $3,600 per child and $350 billion in state and local aid.

These deficits influenced economic policy by prioritizing stimulus over fiscal restraint. The Federal Reserve complemented fiscal policy with near-zero interest rates and quantitative easing, purchasing $3 trillion in Treasury securities to keep borrowing costs low. Tax policy adjusted to support relief, with extended filing deadlines (e.g., May 17, 2021) and temporary exemptions for unemployment income. However, the reliance on borrowing increased the national debt to $27.7 trillion by September 2021, prompting debates about sustainable financing and future tax increases.

[](https://raexpert.ru/researches/budget_policy_2021/)

2022: Inflation Reduction Act and Deficit-Financed Investments

In 2022, the deficit fell to $1.4 trillion (5.5% of GDP) as pandemic relief waned and tax revenues rose due to economic recovery. However, the Inflation Reduction Act (IRA), enacted on August 16, 2022, introduced deficit-financed investments in climate and healthcare. The IRA allocated $80 billion to modernize IRS enforcement, targeting high-income tax evaders, and is projected to generate $851 billion in additional revenue by 2032 by closing the $688 billion annual tax gap. It also imposed a 15% corporate minimum tax on firms with profits over $1 billion and a 1% excise tax on stock buybacks, effective 2023, to fund clean energy credits and reduce the deficit by $124 billion over a decade.

[](https://sciff.ru/10274-2/)

The IRA reflects a shift in economic policy toward long-term fiscal sustainability. By financing investments through targeted tax increases rather than broad rate hikes, policymakers balanced deficit reduction with economic growth. However, the act’s reliance on future revenue projections raised concerns about enforcement capacity and economic impacts, such as reduced corporate investment. The Federal Reserve’s pivot to raising interest rates (from 0.25% to 4.5% by late 2022) to combat 9.1% inflation further constrained policy, increasing debt servicing costs to $475 billion annually.

[](https://ru.wikipedia.org/wiki/%25D0%2591%25D1%258E%25D0%25B4%25D0%25B6%25D0%25B5%25D1%2582%25D0%25BD%25D1%258B%25D0%25B9_%25D0%25B4%25D0%25B5%25D1%2584%25D0%25B8%25D1%2586%25D0%25B8%25D1%2582)

2023–2024: Deficit Management and IRS Modernization

Deficits remained elevated, averaging $1.7 trillion (6.2% of GDP) in 2023 and $1.8 trillion (6.0% of GDP) in 2024, driven by persistent spending on social programs and infrastructure. The IRS leveraged IRA funds to enhance compliance, processing 152.3 million returns in 2024, with 96% filed electronically. New Form 1099-K reporting rules, effective for 2024, lowered the threshold to $5,000 for third-party payment platforms, aiming to capture $8 billion annually from gig economy workers. The Direct File pilot program, launched in 2024, allowed free online filing for 140,000 taxpayers, signaling a policy shift toward accessible tax administration.

Economic policy focused on balancing deficit financing with revenue growth. Policymakers avoided broad tax hikes to prevent economic slowdown but faced pressure from rising interest payments, projected to reach $1 trillion by 2030. The Treasury issued $4.2 trillion in new debt in 2023–2024, with state securities absorbing private capital, potentially crowding out investment. Policies also emphasized digital transformation to improve tax compliance, reducing the deficit indirectly by shrinking the tax gap.

[](https://ru.wikipedia.org/wiki/%25D0%2591%25D1%258E%25D0%25B4%25D0%25B6%25D0%25B5%25D1%2582%25D0%25BD%25D1%258B%25D0%25B9_%25D0%25B4%25D0%25B5%25D1%2584%25D0%25B8%25D1%2586%25D0%25B8%25D1%2582)

2025: TCJA Expiration and Fiscal Challenges

As of April 25, 2025, the impending expiration of the Tax Cuts and Jobs Act (TCJA) on December 31, 2025, looms large. The TCJA’s individual tax cuts, including lower rates and a doubled standard deduction, cost $3.4 trillion over 2018–2025. If not extended, their expiration could reduce the deficit by $4 trillion over a decade but risks slowing GDP growth by 0.9% annually. Policymakers face a dilemma: extending the cuts would widen deficits, while allowing expiration could dampen consumer spending.

[](https://www.ereport.ru/articles/macro/macro17.htm)

Economic policy in 2025 is shaped by deficit-driven trade-offs. The IRS announced inflation adjustments (Revenue Procedure 2024-40), raising the standard deduction to $30,000 for joint filers, softening the impact of potential tax hikes. Disaster relief for Hurricane Helene (September 25, 2025) extended IRA and HSA deadlines, adding $10 billion to short-term deficits. Debates over TCJA extension involve proposals for offsetting revenue, such as raising the corporate tax rate to 25% or closing loopholes, reflecting a cautious approach to fiscal policy.

Broader Impacts on Economic Policy

Budget deficits have driven U.S. economic policy toward short-term stimulus and long-term fiscal consolidation. Key influences include:

Monetary Policy Coordination: Deficits necessitated low interest rates and bond purchases, but rising inflation forced rate hikes, increasing debt costs.
Tax Policy Adjustments: Deficits prompted targeted tax increases (e.g., IRA’s corporate minimum tax) and compliance measures (e.g., 1099-K rules) to boost revenue without broad hikes.
Spending Prioritization: Deficits funded infrastructure, healthcare, and social programs but raised concerns about sustainability, leading to calls for spending cuts.
Debt Management: Rising debt (projected at 122% of GDP by 2035) has pushed policies toward revenue enhancement and enforcement to avoid default risks.

Deficits also carry risks, such as inflation (peaking at 9.1% in 2022) and reduced investor confidence if debt grows unchecked. However, controlled deficits can stimulate growth, as seen in post-pandemic recovery. Policymakers must balance these dynamics to ensure economic stability.

[](https://1prime.ru/20230725/841156915.html)

Summary Table: Deficit Impacts on Economic Policy (2020–2025)

Year	Deficit ($T, % GDP)	Key Policy Changes	Economic Policy Impact
2020–2021	3.1, 14.9%	CARES Act, ARPA, stimulus payments	Stimulus-driven growth, low rates
2022	1.4, 5.5%	IRA, corporate minimum tax	Revenue focus, inflation control
2023–2024	1.7–1.8, 6.0–6.2%	1099-K rules, Direct File	Compliance, digital tax systems
2025	1.9 (est.), 6.5%	TCJA expiration, disaster relief	Revenue vs. growth trade-offs

Federal Deficit Trends (2020–2024)

The chart below shows federal budget deficits as a percentage of GDP, highlighting their scale and influence on policy decisions.

Sources

IRS Tax Updates - https://www.irs.gov/newsroom/tax-updates-and-news-from-the-irs
Details 1099-K rules and 2025 inflation adjustments.
U.S. Treasury Fiscal Data - https://fiscaldata.treasury.gov/americas-finance-guide/government-revenue/
Offers federal revenue and deficit data.
Congressional Budget Office - https://www.cbo.gov/topics/taxes
Provides deficit projections and TCJA analysis.