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What is a 'Budget Deficit'?

A budget deficit occurs when expenses exceed revenue, and it is an indicator of financial health. The government generally uses this term in reference to its spending rather than business or individuals. Accrued government deficits form the national debt.

BREAKING DOWN 'Budget Deficit'

In cases where a budget deficit is identified, current expenses exceed the amount of income received through standard operations. To correct a budget deficit, a nation may need to cut back on certain expenditures, increase revenue-generating activities or employ a combination of the two.

The opposite of a budget deficit is a budget surplus. When a surplus occurs, revenue exceeds current expenses and results in excess funds that can be allocated as desired. In situations where the inflows equal the outflows, the budget is balanced.

In the early 20th century, few industrialized countries had large fiscal deficits. This changed during the First World War; a time when governments borrowed heavily and depleted financial reserves to finance the war and their growth. Industrialized countries reduced these deficits until the 1960s and 1970s, which is when world economic growth rates dropped.

Shifts to Budgets

Budget deficits may occur in response to certain unanticipated events and policies. For example, increased defense spending after the Sept. 11 terror attacks in the United States contributed to the budget deficit. While the initial war in Afghanistan cost an estimated $30 billion, subsequent spending in Iraq cost $50 billion in the fiscal year 2003. At the end of the presidential term of George W. Bush, the total amount spent reached $864.82 billion. Combined with the costs accrued during the presidential term of Barack Obama, the deficit increased to approximately $1.4 trillion.

Budget deficits, reflected as a percentage of Gross Domestic Product, may decrease in times of economic prosperity as increased tax revenue, lower unemployment rates and increased economic growth reduce the need for government-funded programs such as unemployment insurance and Head Start.

Strategies to Reduce Budget Deficits

Countries can counter budget deficits by promoting economic growth through fiscal policies such as reducing government spending and increasing taxes. For example, one strategy is to reduce regulations and lower corporate taxes to improve business confidence and increase treasury inflows from taxes. A nation can print additional currency to cover payments on debts issuing securities, such as Treasury bills and bonds, owe. While this provides a mechanism to make payments, it does carry the risk of devaluing the nation’s currency, which can lead to hyperinflation.

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