Deficit Spending Unit

What Is a Deficit Spending Unit?

A deficit spending unit is an economic term used to describe how an economy, or an economic group within that economy, has spent more than it has earned over a specified measurement period. Both companies and governments may experience a deficit spending unit.

Key Takeaways

  • A deficit spending unit describes how an economy or economic unit within an economy has spent more than it has earned over a given measurement period.
  • The opposite of a deficit spending unit is a surplus spending unit, which leaves money for the company to redistribute.
  • The term deficit spending unit applies not only to corporations but also to households.

Understanding Deficit Spending Units

Deficit spenders can be individuals, sectors, countries, or even a whole economy. When a deficit spending unit is an entire country, it is often forced to borrow from countries that operate as surplus spenders. The effects of deficit spending, if left unchecked, could be a threat to economic growth. It could force a government to raise taxes and potentially default on its debt. When an entity spends more than they take in, they may sell the debt to raise funds. Governments sell Treasury notes and other instruments, while companies may sell equity or other assets.

During times of economic hardship, governments and municipalities are likely to run deficits to shield the effects of a recession and to spur economic growth. Although it is doubtful that an economic unit will operate at a surplus all the time, a prolonged deficit will eventually cause long-term hardship for the economy as debt levels become too high.

According to Keynesian economists, the multiplier theory suggests that a dollar of government spending could increase total economic output by more than a dollar. A multiplier, in economic terms, holds that a change will cause a ripple effect on other sectors of the economy.

Keynesians believe that as the government spends, it will cause an increase in the population's income.

In the U.S., households sometimes represent a deficit spending unit, as these households struggle financially and do not have disposable income available. As a result, they may not be able to purchase additional consumer products, hold money in banks, or invest in the stock market without government (or private) assistance.

The opposite of a deficit spending unit is a surplus spending unit, which earns more than it spends on its basic needs. Therefore, it has money left over for investment into the economy through the form of purchasing goods, investing, or lending. A surplus spending unit can be a household, business, or any other entity that makes more than it pays to sustain itself.

An example of a deficit spending unit is the state of Illinois. According to the governor's office, the state's general funds budget deficit for the fiscal year 2020 is expected to be approximately $3.2 billion as of Feb. 8, 2019, which is roughly 16% higher than the official estimate from the end of 2018.