What Is a Deficit?
A deficit occurs when expenses exceed revenues, imports outweigh exports, or liabilities exceed assets in financial terms. A deficit is the inverse of a surplus and is identical with a shortfall or loss. A deficit occurs when a government, organization, or individual spends more than it earns in a specific period of time, typically a year.
Insight About Deficits
Running a deficit, whether personal, business or governmental, will erode any present surplus or add to any existing debt load. As a result, many individuals assume that deficits are unsustainable in the long run.
On the other hand, according to the famed British economist John Maynard Keynes, fiscal deficits allow governments to acquire products and services that can help stimulate their economy, making deficits a useful weapon for getting nations out of recessions. Proponents of trade deficits argue that they allow countries to get more commodities than they produce—at least temporarily—and that they can also stimulate domestic industries to become more competitive globally.
Opponents of trade deficits claim that they send jobs to other nations rather than developing them in the United States, harming the domestic economy and its population. Furthermore, many say that governments should not run fiscal deficits on a regular basis since the expense of debt servicing consumes resources that could be used more productively, such as providing education, housing, or public infrastructure.
Different Types of Government Deficits
A country can suffer two sorts of deficits:
- Budget deficits
- Trade deficits.
Budget Deficit
A budget deficit arises when a government spends more than it collects in income, such as taxes, in a particular year. As an example, if a government receives $10 billion in revenue in a given year and spends $12 billion in that same year, it has a $2 billion deficit. The country’s national debt is comprised of this deficit plus those from previous years.
Trade Deficit
A trade imbalance occurs when a country’s imports exceed the value of its exports. For example, if a country imports $3 billion in products but only exports $2 billion, it has a $1 billion trade deficit for the year. In effect, more money is leaving the country than is going in, which can lead to a drop in the value of the country’s currency as well as job losses.
Related Deficit Terms
- Along with trade and budget deficit, you may come across the following deficit-related terms:
- A country’s current account deficit occurs when it imports more products and services than it exports.
- Cyclical deficits emerge when an economy is underperforming due to a weak business cycle.
- The techniques governments use to finance their budget deficits, such as issuing bonds or printing extra money, are referred to as deficit financing.
- Deficit expenditure occurs when a government spends more than it collects within a certain period.
- Fiscial deficits occur when a government’s total expenditures exceed its entire revenue, excluding money borrowed.
- The United States Census Bureau defines income deficit as the cash amount by which a family’s income falls short of the poverty line.
- The primary deficit is the current fiscal deficit less interest payments on past borrowings.
- A revenue deficit is the difference between total revenue receives and total revenue expenditures for a government.
- Structural deficits occur when a country runs a deficit despite its economy working at full capacity.
- When an economy has both a fiscal and a current account deficit, it is said to have twin deficits.
The Risks and Advantages of Running a Deficit
Deficits are not always unintended or indicative of a financially troubled government or corporation. Businesses may purposefully run budget deficits in order to maximize future revenue prospects, such as by retaining personnel during slow months to maintain an adequate workforce during busier periods. Furthermore, some governments run deficits in order to fund significant public projects or to continue programs for their residents.
During a recession, a government may purposely run a deficit by reducing its sources of revenue, such as taxes, while maintaining or even increasing expenditures—for example, on infrastructure—to generate jobs and income. The premise is that these policies will increase the purchasing power of the population, hence stimulating the economy.
However, deficits pose risks. For governments, the negative consequences of running a deficit can include decreased economic growth rates or currency depreciation. In the business world, sustaining a deficit for an extended length of time can diminish a company’s share value or possibly force it out of existence.
