What Is a Budget Deficit?

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A budget deficit is the residual debt that comes from spending an amount that is greater than your budget or the amount of positive revenue that you are able to bring in. The term "budget deficit" is often used to refer to a local, state or national governing body. In such cases, a budget deficit is created when the government's expenditures are greater than its tax revenues.

Types of Deficits

There are two main types of governmental deficits that are commonly identified by economists. They are cyclical deficits and structural deficits. A cyclical deficit refers to a scenario in which the government must borrow funds during points of high unemployment to replace tax revenue that would have existed with a lower jobless rate. A structural deficit occurs when a governmental entity spends more than the amount of tax revenue that it brings in during times of low employment. This type of deficit is generally not self-correcting.

Causes

The two main causes of a budget deficit are overspending and not receiving enough tax revenue to cover the predetermined budget in a given year. These causes may occur due to the necessity of paying for unexpected expenses such as emergency military defense or humanitarian aid, or because there is a sudden downturn in the economy or job market.

Consequences

Budget deficits require governments to borrow money or cut back on previously budgeted services. The act of borrowing large sums of money to pay for a budget deficit implies that it will be paid back with interest. This causes the overall budget deficit to increase since interest payments must be incorporated into the existing budget. If a governmental entity attempts to remedy the budget deficit by printing additional money, they may run the risk of causing an inflationary situation whereby the cost of goods and services increase to accommodate a devalued currency.

Solutions

The main solutions that governmental entities can use to eliminate a budget deficit are to reduce spending, to raise taxes or a combination thereof. All of these budget balancing measures tend to be unpopular with large portions of the population. On the one hand, many people depend upon the services, programs and benefits that are paid for by the government. On the other hand, many working individuals believe that they are paying a disproportionate amount for services that do not benefit them. Therefore, the act of balancing a budget will generally be viewed as an unpopular decision by a large segment of the population regardless of the method that is used by the governmental entity.

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