What Are Deficits? Definition, Types, Risks, and Benefits

What Is a Deficit?

In financial terms, a deficit occurs when expenses exceed revenues, imports exceed exports, or liabilities exceed assets. A deficit is synonymous with a shortfall or loss and is the opposite of a surplus. A deficit can occur when a government, company, or person spends more than it receives in a given period, usually a year.

Understanding Deficits

Whether the situation is personal, corporate, or governmental, running a deficit will reduce any current surplus or add to any existing debt load. For that reason, many people believe that deficits are unsustainable over the long term.

On the other hand, the famous British economist John Maynard Keynes maintained that fiscal deficits allow governments to purchase goods and services that can help stimulate their economy—making deficits a useful tool for bringing nations out of recessions. Proponents of trade deficits say they allow countries to obtain more goods more than they produce—at least for a period of time—and can also spur their domestic industries to become more competitive globally.

However, opponents of trade deficits argue that they provide jobs to foreign countries instead of creating them at home, hurting the domestic economy and its citizens. Also, many argue that governments should not incur fiscal deficits regularly because the cost of servicing the debt uses up resources that the government might deploy in more productive ways, such as providing education, housing, or public infrastructure.

Types of Government Deficits

The two primary types of deficits a nation can incur are budget deficits and trade deficits.

Budget deficit

A budget deficit occurs when a government spends more in a given year than it collects in revenues, such as taxes. As a simple example, if a government takes in $10 billion in revenue in a particular year, and its expenditures for the same year are $12 billion, it is running a deficit of $2 billion. That deficit, added to those from previous years, constitutes the country's national debt.

Trade deficit

A trade deficit exists when the value of a nation’s imports exceed the value of its exports. For example, if a country imports $3 billion in goods but only exports $2 billion worth, then it has a trade deficit of $1 billion for that year. In effect, more money is leaving the country than is coming in, which can cause a drop in the value of its currency as well as a reduction in jobs.

Other Deficit Terms

Along with trade and budget deficits, these are some other deficit-related terms you may encounter:

• Current account deficit is when a country is importing more goods and services than it exports.
• Cyclical deficits occur when an economy is not performing well because of a down business cycle.
• Deficit financing refers to the methods governments use to finance their budget deficits—such as issuing bonds or printing more money.
• Deficit spending is when a government spends more than the revenue it collects during a certain period.
• Fiscal deficits occur when a government's total expenditures exceed the revenue that it generates, excluding money from borrowing.
• Income deficit is a measurement used by the U.S. Census Bureau to reflect the dollar amount by which a family’s income falls short of the poverty line.
• Primary deficit is the fiscal deficit for the current year minus interest payments on previous borrowings.
• Revenue deficit describes the shortfall of total revenue receipts compared with total revenue expenditures for a government.
• Structural deficits are said to occur when a country posts a deficit even though its economy is operating at full potential.
• Twin deficits occur when an economy has both a fiscal deficit and a current account deficit.

Risks and Benefits of Running a Deficit

Deficits are not always unintentional or the sign of a government or business that's in financial trouble. Businesses may deliberately run budget deficits to maximize future earnings opportunities—such as retaining employees during slow months to ensure themselves of an adequate workforce in busier times. Also, some governments run deficits to finance large public projects or maintain programs for their citizens.

During a recession, a government may run a deficit intentionally by decreasing its sources of revenue, such as taxes, while maintaining or even increasing expenditures—on infrastructure, for example—to provide jobs and income. The theory is that these measures will boost the public’s purchasing power and ultimately stimulate the economy. 

But deficits also carry risks. For governments, the negative effects of running a deficit can include lower economic growth rates or the devaluation of the domestic currency. In the corporate world, running a deficit for too long a period can reduce the company's share value or even put it out of business.

Today's Federal Budget Deficit in the U.S.

In September 2020, the Congressional Budget Office (CBO) projected a federal budget deficit of $3.3 trillion for 2020, more than triple the deficit for 2019. The increase, the CBO explained, "is mostly the result of the economic disruption caused by the 2020 coronavirus pandemic and the enactment of legislation in response." 

The CBO added that a $3.3 trillion budget deficit would equal 16% of the country's gross domestic product (GDP), making it the largest annual deficit since 1945, the final year of World War II. 

In terms of the national debt, the CBO projected that as of the end of 2020, federal debt held by the public (as opposed to the government itself) will reach 98% of GDP, compared with 79% at the end of 2019. For comparison purposes, before the start of the Great Recession in 2007, it stood at 35% of GDP. 

At this point, the CBO also projects that debt will hit 107% of GDP in 2023, the highest level in the nation’s history.