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What is Budget Deficit?

2016-12-02T09:54:35+00:00

The term 'Budget Deficit' is included in the Accounting edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Budget deficits are accounting positions in which revenues are not sufficient to cover expenditures. As such they involve spending more than the entity takes in from receipts. This term is most often utilized to address government accounting and spending instead of individual or business spending.

This concept can also be applied to a number of government deficits that have been built up over time. In this case, the phrase national debt is employed. A budget surplus is the opposite of the budget deficit. Budgets are balanced when money coming in equals money being spent. Budget surpluses are rare and have occurred for only 6 times since World War II in the United States.

When economic conditions improve and become prosperous budget deficits may decrease as a share of GDP. This happens because tax revenues rise while the economy is growing and unemployment becomes reduced. It also lowers the government expenditures on programs like unemployment. If economic conditions instead deteriorate then budget deficits can grow as a percentage of the country’s GDP. This is because government spending rises to help stimulate the economy and cover higher unemployment while tax revenues typically decline at these times.

Nations are able to fight budget deficits with some efforts. They can do this by encouraging economic growth. They might also choose to raise taxes or lower government spending. One easy way to promote better economic conditions is by decreasing the burdensome regulations and complicated tax rules for businesses. This boosts business confidence and results which inevitably increase tax inflows to the national treasury. Lowering the amount of government expenditures such as defense and social programs and improving the efficiency of entitlement programs like state pensions can also help countries to borrow less money.

The United States has been struggling with deficits since its founding in the 1780s. Alexander Hamilton served as Secretary of the new Treasury in the 1790s. He suggested that the states pay back their Revolutionary War debts via the Federal government using bond issues to assume them and pay them off.

The interest payments on these bonds caused deficits which were not finally eradicated until they paid off the debts in the 1860s. This set a precedent for the U.S. Every war the country fought after the Revolutionary War the nation paid for using debt. This led to increasingly larger deficits.

In the early years of the twentieth century, there were not many industrial countries that struggled with larger budget deficits and debt. This financial position changed dramatically during the First and Second World Wars. In these years, governments were forced to borrow extensively to pay for the expensive conflicts as they ran down their financial reserves.

The United States ran up enormous deficits of 17% of national GDP in World War I and 24% in World War II. The industrial nations were able to reduce their deficits into the 1960s and 1970s thanks to many years of consistent economic growth.

High budget deficits consistently will lead to high national debt. As a percentage of GDP, President Franklin D. Roosevelt earned the record for the largest national budget deficit. By 1949, he had amassed a national deficit of $568 billion that equated to nearly 130% of GDP.

While his deficits remained high because of the New Deal and war costs, they did decline to $88 billion under President Harry Truman. President Barack Obama holds the distinction of having the first $1 trillion deficit in all of history. He ran these up with stimulus programs to battle the Great Recession. In the full first four year term of his time in office, these deficits remained at over $1 trillion per year.

The term 'Budget Deficit' is included in the Accounting edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.