What Is a Deficit
A deficit is an amount by which a resource, especially money, falls short of what is required. A deficit occurs when expenses exceed revenues, imports exceed exports, or liabilities exceed assets. A deficit is synonymous with shortfall or loss and is the opposite of a surplus.
In a deficit, the total of negative amounts is greater than the total of positive amounts. In other words, the outflow of money exceeds the inflow of funds. A deficit can occur when a government, company, or individual spends more than he, she, or it receives in a given period, usually a year.
What's a Deficit?
- A deficit occurs when a resource, money, in particular, is less than the amount required.
- A budget deficit and a trade deficit are the two main types of deficits.
- A deficit adds to one's debt, which most do not consider financially healthy.
Deficits are Controversial
Whether the situation is personal, corporate, or economic, one's deficit adds to one's debt. Therefore, many analysts believe that deficits are unsustainable over the long term.
On the other hand, the famous economist, John Maynard Keynes, posited that fiscal deficits stimulate economies by allowing governments to purchase goods and services; thus, deficits are useful for helping countries out of recessions. Supporters of trade deficits say that they are the direct result of global competition: they exist because consumers are choosing to buy foreign goods—which is a good thing, whatever the reason.
However, opponents of deficits believe that trade deficits provide jobs to foreign countries instead of creating them at home; thus, they hurt the domestic economy. Also, many argue that governments should not incur fiscal deficits regularly because the cost to service the debt deters the government from spending money in more useful ways.
Types of Deficits
The two primary types of deficits a country may have are the budget deficit and the trade deficit. Although the two are interrelated in some ways, they are, in fact, two unique revenue items.
A budget deficit occurs when spending is greater than the revenue received in a given year. As an example, if a country had $10 billion worth of revenue in a year, and its expenditures were $12 billion for the same year, then the country would be running a deficit of $2 billion. The term is generally used for government spending rather than that of businesses or individuals. Accrued government deficits form a country's national debt.
A trade deficit exists when a nation’s imports exceed its exports. For example, if a nation imports $3 billion in goods but only exports $2 billion, then that nation has a trade deficit of $1 billion for that year. The implication is that there is more value entering the country than there is leaving the country. As a result, the country owes more money to other countries than it has due from money owed to it. A trade deficit can also cause a drop in a domestic currency’s value and a reduction in jobs.
Other Terms About Deficit
Along with trade and budget deficits, there are other types of deficits, and associated terms, in finance and economics.
- Current account deficit is when a country imports more goods and services than it exports.
- A cyclical deficit occurs when an economy is not performing because of a down business cycle.
- Deficit financing refers to methods used by a government to finance its budget deficit—the main choices are to issue bonds or to print money.
- Deficit spending is when a government spends more than the revenue it collects during a fiscal period, causing or worsening its debt balance.
- A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings.
- The income deficit is a measurement used by the U.S. Census Bureau for the dollar amount by which a family’s income falls short of the poverty line.
- Primary deficit is the fiscal deficit of current year minus interest payments on previous borrowings.
- Revenue deficit relates only to the government; it describes the shortfall of total revenue receipts compared to total revenue expenditures.
- A structural deficit occurs when a country posts a deficit even when the economy is operating at its full potential.
- The trade deficit is a measure of international trade in which a country's imports exceed its exports.
- Twin deficit is when an economy has both a fiscal deficit and a current account deficit.
Deliberately Running a Deficit
Deficits are not always inadvertent or problematic. Businesses may run budget deficits to maximize future earnings opportunities—such as retaining employees during slow months to ensure an adequate workforce in busier times. Also, some governments run deficits to finance public projects and maintain programs for their citizens.
During a recession, a government may run a deficit intentionally by decreasing sources of revenue, such as taxes, while maintaining or even increasing expenditures—on infrastructure, for example—which provide employment and income. The theory is that these measures would boost the public’s purchasing power, which in turn would stimulate the economy.
Risks of Running a Deficit
If a deficit is large enough, it can cancel out equity for an individual or a company's shareholders. For a government, the negative effects include lower economic growth rates (budget deficit) or a devaluation of the domestic currency (trade deficit).
The experience of governments that have run persistent deficits in the 20th and 21st centuries have complicated neoclassical analyses—which holds that competition leads to an efficient allocation of resources within an economy and establishes market equilibrium between supply and demand. The Great Recession led many neoclassical economists to speculate that government budgets would collapse under the weight of persistent spending deficits.
Real World Example of Deficit—U.S. Deficit Stands to Reach $1 Trillion in 2020
The U.S. federal budget deficit rose in the first quarter of the fiscal year 2019 and should surpass $1 trillion per year by 2020. This increase means that America is spending way more money than it brings in—as President Donald Trump’s signature tax cuts continue to reduce corporate tax revenue, and the Trump administration proceeds to set records of defense spending.
A growing deficit is not a new problem. However, the United States has never run this high of a deficit during good economic times. Currently, the U.S. economy is growing, unemployment is low, and confidence is strong. In times like these, the U.S. government has almost always narrowed the budget deficit—or even run a surplus, as it did from 1998 to 2001—rather than widen it.
At times, the U.S. deficit has been large, and at other times the budget has achieved a balance or a surplus. The reasons for deficits vary, and there is constant debate concerning their causes. Nonetheless, in our increasingly globalized economy, the deficit has become a polarizing issue.