What is Deficit Spending?

Published by Thomas Herold in Corporate Finance

'Deficit Spending' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Deficit spending is a generally unsustainable scenario where a greater number of resources are employed to secure purchases than are brought in to the organization through revenue generating means. When this is the case, the business or government outfit actually operates in a budget deficit.

This simply means that not enough financial resources are being created by the organization in order to effectively fund the operating budget. As this occurs, the additional expenses are paid for by utilizing deferred payment plans that permit the organization to buy now and pay later, or alternatively with credit accounts.

Even though such deficit spending can occur with consumers and businesses, it is generally discussed pertaining to governments and their operations. These days, governments are mostly incapable of running their operations without resorting to deficit spending. As the taxes that are collected generally are insufficient to cover all of the costs that are proposed by the annual budget, the shortfall is commonly covered by buying things with money that has been borrowed. In such a way, these governments run their activities in a deficit spending scenario.

Not every government runs its affairs from a negative budget scenario all of the time. There are periods where governments can look forward to the revenues that come in from taxes and any investments surpassing the money that is required to cover the costs of budgetary items. In these moments, governments have the opposite of deficit spending situations. They are running on budget surpluses. Surpluses are used for a variety of different needs, such as infrastructure improvements, repayment of debt from past deficit spending, or savings for future budget deficits.

Without a doubt, deficit spending proves to be all too common for governments. This does not make it a wise economic policy to pursue continuously over extended time frames. The reason for this is that deficit spending commonly requires borrowing funds that must be paid back with interest that accrues over time. In such a way, enormous amounts of government debt can be built up in short time frames.

Because of this, a number of responsible governments attempt to intelligently manage their deficit spending in such a way that they only engage in it to keep up critical operations and services that the citizens need for their well being. Other less important programs they try to cut back on whenever possible.

Companies may sometimes operate on a deficit spending basis. If they do this for long periods of time, then they are often unable to turn the failing trend around. The end result of this behavior leads to bankruptcy or being purchased by other, more fiscally responsible businesses. Consumers that engage in deficit spending for longer periods than only temporary time frames similarly discover that the scenario ends up in financial destruction. Outstanding assets may then be liquidated to satisfy the debts that result.

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The term 'Deficit Spending' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.