Budget Deficit

A budget deficit occurs when the annual expenses of a budget exceed the yearly income of the budget, indicating an unhealthy financial state of a country. It can, however, be reduced by making the attempts and applying different measures like reduction of revenue outflow and increasing revenue inflow.

A federal budget deficit is not always negative for the economy. The extra money spent by the government is used for productive work, like building infrastructure, which signifies economic growth and attracts investments.

• A budget deficit is where annual expenses exceed the yearly income, indicating the country’s financial unhealthiness.
• One can reduce the budget deficit by taking various measures such as revenue outflow reduction and increasing revenue inflow. 
• Slow economic growth, high government spending, a high unemployment rate, and a combination of the above factors cause the budget deficit.
• Two ways to reduce the budget deficit are increasing revenue and reducing spending.

The budget deficit meaning clearly shows how the expenses have exceeded the revenue gathered through taxes. The investors and the financial analysts are the two important participants in determining whether the government deficit would impact a country in a positive or negative way.

Let us check out the factors that determine the effect of such deficits on an economy:

• The first factor is why government expenditure is so high. Is it because the government has invested in specific infrastructure or invested the money in an investment that can yield high returns? Financial analysts give a green signal to the government deficit if that is the case. And if not, analysts can mark them as a poor expenditure.
• The second factor is how the deficit or the national debt impacts the country. We call it national debt because the government requires borrowing money to pay for some things due to a lack of revenue.
• The effects of the deficit may be havoc on the country’s economic affairs. However, if the outcome is mild, the debt is not a problem and vice versa.

The budget deficit is found to occur in various forms. These include:

• Primary deficit: It is defined as the difference between the fiscal deficit of a year and the interest payments due for the previous loans.
• Fiscal deficit: It includes the extent to which the expenses exceed the total receipts, excluding the borrowings.
• Revenue deficit: It is defined as the extent to which the total revenue expenditure exceeds the overall revenue received. It indicates that the government’s revenue generated is not adequate enough to bear the expenses.

The budget deficit formula is as follows:

Budget Deficit = Total Expenditures by the Government − Total Income of the government

• The government's total income includes corporate taxes, personal taxes, stamp duties, etc.
• The total expenditure includes defense, energy, science, healthcare, social security, etc.

Recently, the U.S. budget deficit climbed to $779bn, its highest since 2012. Let us calculate the budget deficit of the United States.

Overall Income Breakup (US):

• Individual Income Tax = $1,684 billion
• Social Security and Other payroll taxes = $1,171 billion
• Corporate Income Taxes = $205 billion
• Other Taxes and Duties = $270 billion

Total Income (U.S.) = $1,684 billion + $1,171 billion + $205 billion + $270 billion = $3,329 billion.

Overall Expenditure Breakup (US):

• Defense = $665 billion
• Social Security = $988 billion
• Medicare = $589 billion
• Interest on Debt = $325 billion
• Others = $1542 billion

Total Expenditure (US) = $665 billion + $988 billion + $589 billion + $325 billion + $1542 billion = $4,108 billion.

• Budget Deficit = Total Expenditures by the Government − Total Income of the government.
• US Budget Deficit = $4,108 billion – $3,329 billion = $779 billion.

So, what are the factors that cause the budget deficit? Let us have a glance at them: -

#1 - Slow Economic Growth:

If a country's economy is not going as fast as the government spends money, it can experience slow economic growth (due to inflation and other economic factors). As a result, the government does not collect as much money as planned and deals with the deficit.

#2 - High Government Spending:

If a government has been investing a lot of money into a particular project that would yield huge gains in the future, then it may create a deficit for the government for the current period. That is good if the government has spent the money on the sustainable growth of an investment or an infrastructure. But it is futile if the expenses do not ensure sustainable development or are incurred to support some unsustainable overheads.

#3 - High Unemployment Rate:

If a country is experiencing a high unemployment rate, maybe the government needs to pay more subsidies for that purpose. Therefore, it should make all efforts to improve the unemployment rate to reduce the number of grants and accelerate economic growth.

#4 - Combinations of the above Factors:

Excessive government spending may not happen due to a particular reason. Instead, the combinations of all the factors may become responsible for the deficit in a country. Therefore, the government should make an effort to keep the expenses low and create more avenues to gather more revenues.

There are only two ways to reduce the budget deficit- increasing revenue and reducing spending.

However, for the government, it is very tricky.

• The two significant ways to increase revenue for the government are increasing the tax percentage and ensuring economic growth. However, if the government increases too much tax, it may affect economic growth and not drastically improve it.
• To reduce expenses, the government needs to reduce expenditure. However, reducing too many costs will affect the economy of the country. Since government spending is a part of the country's GDP, the excess reduction will slow down economic growth.
• The idea is to understand the current state of affairs and address the government deficit.

While the budget deficit covers the overall impact of expenditures being more than the receipts, the fiscal deficit is only a part of it, which signifies the figures by which the total revenue generated for the current year is not enough to cover the expenses incurred for that year. Let us check out the comparison, including the differences between a budget deficit and a fiscal deficit and the similarities between them:

• A budget deficit occurs when the income for a year is insufficient to cover the expenditure for that year. On the contrary, a fiscal deficit is a type of budget deficit that signifies the insufficiency of revenue in bearing expenses, especially unexpected ones.
• Both these forms of deficits lead to higher debts and increased borrowings for the country to bear the expenditure that exceeds receipts or income.
• In short, both these terms are related to assessing the financial stability of any economy.

This article has been a guide to what is Budget Deficit. Here we explain its formula, vs fiscal deficit, its types, causes, effects, an example & how to reduce. You can learn more about economics from the following articles: -

• Autonomous Expenditure
• Budget Surplus Interpretations
• Current Account Deficit
• Budget Analyst
• Balance of Trade vs Balance of Payments