Budget Deficit

AAA

DEFINITION of 'Budget Deficit'

A status of financial health in which expenditures exceed revenue. The term "budget deficit" is most commonly used to refer to government spending rather than business or individual spending. When referring to accrued federal government deficits, the term "national debt” is used.

The opposite of a budget deficit is a budget surplus, and when inflows equal outflows, the budget is said to be balanced.

INVESTOPEDIA EXPLAINS 'Budget Deficit'

In the early 20th century, few industrialized countries had large fiscal deficits. This changed during the First World War, a time in which governments borrowed heavily and depleted financial reserves. Industrialized countries reduced these deficits until the 1960s and 1970s despite years of steady economic growth.

Budget deficits as a percentage of GDP may decrease in times of economic prosperity, as increased tax revenue, lower unemployment and economic growth reduce the need for government programs such as unemployment insurance. If investors expect higher inflation rates, which would reduce the real value of debt, they are likely to require higher interest rates on future loans to governments.

Countries can counter budget deficits by promoting economic growth, reducing government spending and increasing taxes. By reducing onerous regulations and simplifying tax regimes, a country can improve business confidence, thereby prompting improved economic conditions while increasing treasury inflows from taxes. Reducing government expenditures, including on social programs and defense, and reforming entitlement programs, such as state pensions, can result in less borrowing.

VIDEO

Loading the player...
RELATED TERMS
  1. Rubinomics

    A combination of the words "Rubin" and "economics" that focuses ...
  2. Deficit Hawk

    Slang for someone who wants the government to keep the federal ...
  3. Austerity

    A state of reduced spending and increased frugality in the financial ...
  4. Fiscal Deficit

    When a government's total expenditures exceed the revenue that ...
  5. Revenue

    The amount of money that a company actually receives during a ...
  6. Deficit

    The amount by which expenses exceed income or costs outstrip ...
RELATED FAQS
  1. Why would a company choose to operate on a deficit budget in lieu of a balanced budget?

    The terms budget deficit and balanced budget refer to an entity's expenditures compared to its revenues during a budget period. ... Read Full Answer >>
  2. Should investors worry about the budget deficit?

    Investors should be very concerned about the U.S. federal budget deficit, but primarily so in terms of how it relates to ... Read Full Answer >>
  3. Which countries run the largest budget deficits?

    The countries with the largest budget deficits as of March 2015, in order, are Kuwait, Macau, the Republic of Congo, Norway, ... Read Full Answer >>
  4. Which United States Presidents have run the largest budget deficits?

    While most U.S. presidents over the past 75 years have run budget deficits for many if not all of their years in office, ... Read Full Answer >>
  5. What are the ethical arguments against government subsidies to companies like Tesla?

    The ethical argument behind government subsidies is that they should be put into place to help industries that will, in turn, ... Read Full Answer >>
  6. What happens if the Federal Reserve lowers the reserve ratio?

    If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required ... Read Full Answer >>
Related Articles
  1. Economics

    Successful Ways That Governments Reduce Federal Debt

    Governments have many options when trying to reduce debt, and throughout history some of them have actually worked.
  2. Bonds & Fixed Income

    A Look At National Debt And Government Bonds

    Learn the functions of the U.S. Treasury, and find out how and why it issues debt.
  3. Economics

    Why Governments Issue Foreign Bonds

    Government bonds issued in foreign currency have drawn a growing amount of interest in recent years. This article explores why governments, particularly those in emerging markets, choose to denominate ...
  4. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  5. Professionals

    Government Financial Careers: What To Expect

    Government careers paths can offer you the variety of the private sector with added job security and benefits.
  6. Economics

    How Governments Influence Markets

    The biggest influence in the markets today can create some unintended consequences.
  7. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  8. Economics

    Twin Deficits: Twice The Fun For The U.S

    The U.S. has been running both fiscal and current account deficits for years, but what does it all add up to?
  9. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  10. Budgeting

    Current Account Deficits: Government Investment Or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!