Do Deficits Cause Inflation?

When the Reagan administration first took office, it forecast federal-budget deficits of $45 billion for fiscal year (FY) 1982 and $23 billion for FY 1983, and it projected a balanced budget by FY 1985. Fiscal year 1982, however, ended in September with a record $110-billion deficit, and most budget analysts now expect a deficit of approximately $170 billion to $180 billion in FY 1983. Moreover, the deficit could easily remain above $100 billion through FY 1985 unless Congress cuts expenditures or increases taxes. The federal government must finance these deficits by selling Treasury securities either to the Federal Reserve System or to the public.