What is a Budget Deficit/Surplus?

When the Federal Government’s spending exceeds its revenue within a set period, they’re experiencing a budget deficit. It’s important to note that budget deficits can occur in any organization with revenue and expenses, not just governments.

Budget deficits are significant because they tend to cause an uptick in government debt. If debt persists over a relatively long period, it could lead to tax increases to help repay the debt. Budget deficits can also signal how well a country’s economy is doing.

What Happens During A Budget Deficit?

When the government has a budget deficit, it borrows money to keep programs running. This money is borrowed by means of selling U.S. Treasury bonds, bills, and other securities.

The debt governments accumulate when borrowing this money via selling securities in addition to the interest they owe contributes to the national debt.

Investors who buy bonds, bills and other securities from the government are essentially loaning them money plus interest. When the government needs to borrow robust amounts of money through securities, they tend to offer investors higher interest rates.

Budget deficits can have a negative impact on inflation, interest rates, and economic growth.

Causes of Budget Deficits

How are budget deficits caused? When the economy isn’t doing well, it has a domino effect on the government’s cash flow. In other words, when people and businesses experience a decrease in income, so does the government because they receive less in taxes. It can also lead to increased government spending, which can further create a deficit. For instance, the government may decide to increase spending on economic security programs like food stamps, housing, or unemployment when the economy isn’t doing well. When government spending supersedes the revenue coming in, a deficit is a natural consequence.

An increase in government spending doesn’t always mean there’s trouble in sometimes spending goes up to boost the economy.

Improving Budget Deficits

To improve a deficit, governments may introduce new fiscal policies. The types of policies they can put in place can range from imposing new payroll taxes to reducing itemized deductions. Governments may also increase activities that help generate more income or raise taxes on high-income earners and businesses to reduce their deficit. The latter can have a counter-effect of not having enough revenue to create new business or hire new employees.

As mentioned, selling government securities is another way to borrow money that will hopefully help reduce the deficit along the line.

Deficit vs Surplus

A budget surplus is the opposite of a budget deficit. It’s when the government has more money coming in than going out. Surplus usually happens when the economy is healthy. The upside of budget surpluses is that the government has more revenue for spending and can potentially lower taxes. Being in surplus can also be a saving grace in case a financial emergency arises as there’ll be less need to borrow money.

It is possible for a budget to be balanced, which is where revenues and expenses are equal and there’s neither deficit or surplus. Balanced budgets aren’t common seeing as economies ebb and flow.