Budget Deficit


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.


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BREAKING DOWN '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.

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  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 >>
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    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?

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