EconixaECONOMICS FUNDAMENTALS

Budget Deficit

Plain definition

The amount by which government spending exceeds tax revenue in a given year.

In economics

A budget deficit is an annual flow: it measures one year's shortfall and adds to the national debt. Deficits naturally widen in recessions (revenues fall, stabilizer spending rises) and are often deliberate during downturns as expansionary fiscal policy. Persistent deficits raise debt and future interest costs.

Example

In a fiscal year the government spends 6.1trillionandcollects6.1 trillion and collects 4.9 trillion in taxes. The 1.2trilliondifferenceisthebudgetdeficit,financedbyissuingTreasurybonds,whichincreasestheoutstandingnationaldebtby1.2 trillion difference is the budget deficit, financed by issuing Treasury bonds, which increases the outstanding national debt by 1.2 trillion.

Common confusion

The budget deficit is confused with the national debt. The deficit is the one-year shortfall (a flow); the debt is the accumulated total of all past deficits minus surpluses (a stock). A smaller deficit still ADDS to the debt as long as spending exceeds revenue.