1. Tax Cuts: In 1981, President Ronald Reagan signed into law the Economic Recovery Tax Act (ERTA), which introduced substantial tax cuts for individuals and businesses. The goal was to stimulate economic growth by increasing investment and consumer spending. While the tax cuts had some positive effects on economic growth, they also significantly reduced tax revenue for the government.
2. Increased Military Spending: During the 1980s, the United States engaged in heightened global political and military activities, particularly in the context of the Cold War and the arms race with the Soviet Union. Significant investments were made in military research, weapons systems, and troop strength, leading to a dramatic increase in military expenditures.
3. Recession: The U.S. experienced a recession in the early 1980s, characterized by economic slowdown, high unemployment rates, and decreased economic activity. As government revenues declined due to reduced economic activity, the need for government spending (such as unemployment benefits) increased, further straining the budget.
The combination of these factors – reduced tax revenue due to tax cuts and a surge in military spending coinciding with a recession – resulted in the largest budget deficit in U.S. history at that time. The federal budget deficit reached a record high of $221 billion in fiscal year 1986.