Government budget deficits


  • National public sector deficits
  • Unsustainable national fiscal policies
  • Unbalanced national budgets
  • Government deficit spending
  • Imprudent national budgets
  • Government overspending
  • Imbalance of government revenue mobilization and expenditure allocation
  • National current account deficit

Description

The government budget balance, also referred to as the general government balance, public budget balance, or public fiscal balance, is the difference between government revenues and spending. For a government that uses accrual accounting (rather than cash accounting) the budget balance is calculated using only spending on current operations, with expenditure on new capital assets excluded. A positive balance is called a government budget surplus, and a negative balance is a government budget deficit. A government budget presents the government's proposed revenues and spending for a financial year. The government budget balance can be broken down into the primary balance and interest payments on accumulated government debt; the two together give the budget balance. Furthermore, the budget balance can be broken down into the structural balance (also known as cyclically-adjusted balance) and the cyclical component: the structural budget balance attempts to adjust for the impact of cyclical changes in real GDP, in order to indicate the longer-run budgetary situation. The government budget surplus or deficit is a flow variable, since it is an amount per unit of time (typically, per year). Thus it is distinct from government debt, which is a stock variable since it is measured at a specific point in time. The cumulative flow of deficits equals the stock of debt when a government employs cash accounting (though not under accrual accounting).
Source: Wikipedia

Background

An excessive one year deficit in governmental accounts or a pattern of continuing deficits over a number of years creates public or national debt. The remedy of reducing expenditures is rarely effective, some elements being inviolable in some countries, as, for example, social welfare spending, civil service payrolls, or defence and foreign aid budgets. The government may also be constrained not to raise taxes, so that financing of the deficits must be done through the creation of fiat money or by borrowing on the non-governmental money markets. Deficits indicate excessive governmental spending. Governmental borrowings to finance them reduce the financial resources available for private investment. Governmental increases in taxation reduce the incentives to invest. If there are no disincentives, deficit borrowings will cause interest rates to go up as there will be a demand for capital exceeding supply. Unsustainable fiscal deficits provoke capital flight because domestic savers anticipate a coming crisis that is likely to involve a major devaluation and new taxes on income and consumption.

Incidence

Deficits can be more easily absorbed by countries with high rates of domestic private savings and well-developed capital markets. Thus a relatively high deficit need not cause problems in an efficient high-saving economy, whereas in a low-saving, highly distorted one, even a small deficit might be destabilizing.

Claim

  1. Fiscal deficits are a principal cause of the international debt crisis, both directly, because they mean greater public borrowing, and indirectly, because they encourage the private sector to send its capital to elsewhere.

Counter claim

  1. Deficits in themselves do not automatically imply macroeconomic problems. If the use of public resources is sufficiently productive, future income can be generated to cover the servicing costs of any debts incurred. If expenditures rise owing to temporary factors, such as wars or natural disasters, then deficits may be justified as a way to spread the cost over several years.

    Some countries have adopted laws that require the national budget to be balanced. Electoral promises to balance the budget may also be made. The economic rationale for this is questionable. A budget designed to achieve targets consistent with an appropriate response to inflation, public debt, and private sector growth does not necessarily require a balanced budget, even if this can be achieved in practice. Balanced budget laws are relatively easy to circumvent in practice by excluding certain items, such as state-controlled enterprises. Preoccupation with balanced budgets can also complicate fiscal planning. They also provide the finance ministry with a ready-made excuse for resisting calls for public spending.


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