What is a Deficit?

Published by Thomas Herold in Accounting

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

Deficits are shortfalls in government revenues that result from them spending more money than they bring in from revenues. The deficit of a government is measurable by including or excluding the interest it pays for its debt. Primary deficit is simply the difference in all taxes and revenues less the present level of government outlays. Conversely, total deficits, usually simply referred to as the deficit, prove to be all spending along with payments on the interest of the debt less the revenues coming in from taxes.

Such fiscal deficits also expand and contract as a result of changing trends in economics. As an example, higher amounts of economic activity in a nation give greater revenues in taxes to the Federal Government. At the same time, economic downturns generally cause a government to increase its levels of expenditures in order to boost spending on unemployment benefits and other types of social insurance programs.

The amount of public debt is also impacted significantly by the amounts of social benefits funded, alterations in the tax code or tax rates, methods of enforcing tax policies, and various additional decisions made with government policies. In other countries that have tremendous energy natural resources such as oil and natural gas, including Saudi Arabia, Russia, Norway, and other nations who are a part of the OPEC, or Organization of Petroleum Exporting Countries, these incomes form the energy sources have an enormous impact on the national finances.

Another impact on the real tangible value of a government deficit, or debt, comes from the amounts of inflation in a country. Over time, inflation lowers the real currency value of such debt. The downsides to inflation result in a government having to pay greater interest rate levels on its debts. This causes public coffers borrowing to become more expensive.

Government deficits are comprised of two main parts. These are cyclical deficits and structural deficits. Cyclical deficits result from any and all extra borrowing that a government has to engage in during the low point of a business cycle. This comes from higher unemployment levels. As unemployment rises, tax receipts fall and expenditures on things like social security inversely rise. The implied definition of cyclical deficits is that they will be completely repaid in the next cyclical peak. This is because a surplus in revenues will exist as taxes rises and spending is lower.

Structural deficits instead represent deficits that are constant regardless of the economic cycle. This results from the overall government expenditure levels being unsustainable in light of the current tax rates. The overall budget deficit is then figured by adding the structural deficit to the cyclical surplus or deficit that exists. Although this is the mainstream distinction between the types of deficits, there are economists who say that the differences between the structural and cyclical deficits are impossible to determine. They contend that cyclical deficits simply can not be measured properly.

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