Definitions of government budget deficit

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Fiscal Policy: Government Budget Deficits

This section explains the definition of a government budget deficit, a key concept in understanding fiscal policy.

What is a Government Budget?

A government budget is a financial plan for a specific period, usually a year. It outlines the government's expected revenues (income) and expenditures (spending).

Government Budget Deficit: Definition

A government budget deficit occurs when a government's total expenditures exceed its total revenues in a given period.

In simpler terms, it means the government is spending more money than it is bringing in.

Formula

The budget deficit can be calculated using the following formula:

Budget Deficit = Total Government Expenditure - Total Government Revenue

Or, in terms of a percentage of GDP:

$$ \text{Budget Deficit Percentage} = \frac{\text{Budget Deficit}}{\text{Gross Domestic Product (GDP)}} \times 100 $$

Table: Example of a Government Budget

Item Amount (in Billions of Currency Units)
Total Government Revenue (e.g., Taxes) $2,500
Total Government Expenditure (e.g., Healthcare, Education, Defence) $3,000
Budget Deficit $500

Consequences of a Budget Deficit

A budget deficit can have various economic consequences, including:

  • Increased government borrowing (leading to higher national debt).
  • Potential increase in interest rates.
  • Inflationary pressures.
  • Crowding out of private investment.

How is a Budget Deficit Financed?

Governments typically finance budget deficits by:

  • Borrowing money from the public (e.g., issuing bonds).
  • Borrowing from other governments or international institutions.
  • Printing money (which can lead to inflation).

Relationship to Fiscal Policy

A budget deficit is a direct result of fiscal policy decisions. Governments can intentionally use fiscal policy (through changes in taxation and government spending) to influence the budget balance.

Suggested diagram: A simple diagram showing Government Revenue and Government Expenditure with a clear indication of the budget deficit when expenditure exceeds revenue.

Key Terms

  • Government Expenditure: The total amount of money the government spends.
  • Government Revenue: The total amount of money the government receives (primarily through taxes).
  • National Debt: The total amount of money the government owes.
  • GDP: Gross Domestic Product - the total value of goods and services produced in a country.