Understanding the Effects of Fiscal Deficits on an Economy

The U.S. Fiscal Deficit
The U.S. federal shortfall for fiscal year 2020 was $3.1 trillion (due in large part to the coronavirus pandemic). The gap increased from 2019's deficit of $984 billion. Fiscal year 2021's budget deficit came in at $2.7 trillion. Such a deficit occurs because the U.S. government currently spends more than it receives.4
The deficit in the U.S. is the result of three factors.

1. 
   The so-called "War on Terror" following the events of 9/11 has added $2.02 trillion to the debt since 2001.5 Annual military spending has doubled.6 Tax cuts are another cause of the burgeoning deficit because they reduce revenue for each dollar cut.
   
2. 
   The Trump tax cuts reduced revenue and increased the deficit. These tax cuts were expected to total $1.5 trillion over 10 years. While the Joint Committee on Taxation expected that the cuts would stimulate growth by 0.7% annually, thereby offsetting some of the lost income, the deficit would increase by $1 trillion over 10 years.7 
   
3. 
   Lastly, Social Security is another contributor to the deficit. According to the Henry J. Kaiser Family Foundation, Medicare spending accounted for 15% of total federal spending in 2018. Per capita spending was expected to grow at an average annual rate of 5.1% through 2028.8
   

The next few years should see an even larger deficit, as the 2020 global coronavirus pandemic caused a spike in unemployment and business closures, which reduced tax revenues for the government.
At the same time, Congress passed a $2.2 trillion spending and stimulus package to blunt the economic blow of the public health crisis. This package greatly increased the fiscal budget gap.9 Then, during the Biden administration, Congress passed the $1.9 trillion emergency Pandemic Relief Bill.10 The effects on the deficit are likely to be long-lasting.
Impact in the Shorter-Term
Even though the long-term macroeconomic impact of fiscal deficits is subject to debate, there is far less debate about certain immediate, short-term consequences. However, these consequences depend on the nature of the deficit.
If the deficit arises because the government has engaged in extra spending projects—for example, infrastructure spending or grants to businesses—then those sectors chosen to receive the money receive a short-term boost in operations and profitability.
If the deficit arises because receipts to the government have fallen, either through tax cuts or a decline in business activity, then no such stimulus takes place.
Whether stimulus spending is desirable is also a subject of debate, but there can be no doubt that certain sectors benefit from it in the short run.