Deficit Spending

Deficit spending refers to the technique by which an entity spends more than its revenue during a specific period. The term is often associated with the government’s fiscal policies to energize the economy by increasing spending.

During a recession, the government spends more to increase ordinary people's money supply and purchasing power. To offset such deficits, the government usually issues securities. When government expenditure is greater than the revenue, it contributes to what is known as a expenses. The budgetary deficit could be the sum of the deficit from revenue and capital account. " url="https://www.wallstreetmojo.com/budget-deficit/"]budget deficit. Continuous deficit spending by year results in national debt.

• Deficit spending’s definition explains it as spending more than what is available as income. The term is typically associated with government spending but can also be applied to other entities.
• During economic downturns, Keynesian economics calls for higher levels of government expenditure to revive the economy, whereas fiscal conservatism advocates for lower levels of government spending.
• During the Great Depression, President Roosevelt implemented the new deal entailing various initiatives reflecting the higher level of spending and saving the economy from collapsing.
• A continual budget deficit will lead a country into national debt.

Deficit spending is considered necessary during economic downturns because the government spending exceeding its revenue during a recession will result in a multiplier effect, ultimately leading to economic upliftment. For instance, government spending or purchases can increase business profitability and market size. That, in turn, escalates income and personal consumption expenditure. It subsequently increases the demand for goods and services, private investment, employment opportunities, and GDP.

The budget deficit scenario was primarily associated with funding a war. However, it is mainly used to support citizens and promote economic growth when needed. Government can implement spending above revenue in different ways like a cut on tax receipts, increasing expenditures on existing government programs, or new programs. Sometimes automatic stabilizers/deficits are enough to replace the need for deficit spending.

This ideology of government effort to cause economic development aligns with Keynesian economics promoting deficit during recession and surplus during the economic boom. Opponents of Keynesianism encourage government adherence to a balanced budget. In addition, opponents argue that overspending will harm the economy through increased interest rates and associated reductions in investment.

The prolonged effect associated with overspending may contribute to inflation and national debt. Therefore, the government should attain a budget surplus promptly to reduce the public debt and associated services like interest payments. To generate a budget surplus, the government would need to cut down on spending, and in most cases, that would mean cutting a government program.

Here is a simple deficit spending example that we can witness in everyday life:

The monthly income of Mr. A is $5,000 after taxes, and the total expense per month is $4,000, inclusive of rent, insurance, utilities, groceries, and other miscellaneous costs. Therefore, he can save or spend the remaining $1,000 attributable to discretionary income. For example, in the current month, assume Mr. A bought a car worth $16,000 using his savings of $7,000, current month discretionary income of $1,000, and loan of $8,000.

Monthly income: $5,000

Monthly expense: $4,000

Discretionary income: $1,000 ($5,000-$4,000)

Funds utilized for the purchase of the car: $7,000 savings+ $1,000 discretionary income of current month $8,000 loan.

That points to a scenario of spending more than revenue because Mr. A obtained part of the amount by borrowing funds, contributing to debt.

The objective of fiscal policies until the great depression focused on maintaining a balanced budget. Then, the roaring twenties, referring to a period of economic prosperity from 1920 to 1929, began to slow down, leading to a recession that turned into the great depression, which started in 1929 and continued till the end of World War II.

President Franklin D. Roosevelt implemented policies to revive the economy and banking system during the great depression. It included various banking acts, stalling the use of the gold standard, creating national banking holidays, and other techniques attributed to the fiscal policies. In addition, Roosevelt introduced the “new deal,” which represented the framework outlining various programs, policies, and projects to support the economy. These programs embracing deficit spending were intended to increase business output, create jobs, price improvisation, wage enhancement, and increase the government’s role in the economy.

The spending programs and employment opportunities associated with World War II helped reverse the economy and decrease unemployment. In addition, the new deal and other spending programs introduced during the Great Depression changed the way many people think about federal deficit spending and its impact on the economy.

This article is a guide to Deficit Spending. Here, we discuss the deficit spending definition, an example, the Great Depression of the U.S. and its causes. You may also have a look at the following articles to learn more: -

• Revenue Deficit
• Current Account Deficit
• Trade Deficit