What is a budget deficit?

Budget deficit is a term usually used in relation to government spending, as opposed to that of businesses or individuals. Normally used as a measure of the financial health of a country, we can define budget deficit as when expenses (amount spent) exceeds revenues received (taxes and other incomes), typically measured over the course of a single year. Budget deficits that are allowed to accrue over time form national debt, the total money a government has borrowed.

Where have you heard of the budget deficit?

Budget deficits are often a popular topic among politicians running for office. They routinely use it as a tool to help their campaign by making promises to bring budget deficits down. However, it is important to note that budget deficits are not necessarily the government’s fault and are sometimes unavoidable.

You may have also heard the term when discussing the state of an economy. Periods of economic recession or growth directly impact the revenues received by governments. If revenues decrease and spending remains the same, a budget deficit will accrue. Conversely, if revenues increase and spending remains unchanged, a budget surplus will occur.

What do you need to know about the budget deficit?

Now that we have the budget deficit explained, let’s take a look at several key points to remember:

A budget deficit occurs when total government spending exceeds revenues received;
A reduction in government expenditure can decrease a budget deficit, meaning that government revenues exceed government spending;
A budget deficit can also be reduced by increasing revenues – usually in the form of increased taxes on individuals or businesses.

Generally speaking, there are two main causes of a budget deficit:

Fiscal policy. This relates to choices made by governments in relation to spending and taxation. If a government decides to make large investments in infrastructure, healthcare, or energy for example, but does not receive the revenues to cover the cost, it will generate a budget deficit.
State of the economy. During periods of economic recession or slow economic growth, governments lose money due to less money being spent. If unemployment rises then fewer workers are paying income tax, which results in less revenue for the government.

Let’s take a look at the most recent example of the budget deficit to consider. The Covid-19 pandemic has turned the world on its head and millions of people lost their jobs as a result of national lockdowns and the closure of non-essential businesses. The knock-on effect of this is two-fold:

As unemployment rises, governments receive less income tax;
Governments were forced to implement emergency measures to stimulate the economy and financially support those who had lost their jobs.

In 2020, US government expenditure surged to $6.55trn in attempts to support the economy in the wake of the pandemic, while revenues fell to $3.42trn. This left a budget deficit of $3.1trn, further contributing to national debt. As of December 31, 2020, the US national debt totalled $27.75trn.