Budget Deficit

By: EconomyWatch   Date: 29 June 2010

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A Budget Deficit is a common economic phenomenon, generally taking place on governmental levels. Budget Deficit occurs when the spending of a government exceeds that of its financial savings. In fact, budget deficit normally happens when the government does not plan its expenses, after taking into account its entire savings.

Budget Deficit: Some facts and Information

Budgetary deficits when accrued for a very long span of time, say for several decades or centuries, is termed as Government Debts. Under such circumstances, a certain portion of the governmental expenditure is then utilized for repayment of such debts, with some maturity. This maturity is capable of being re-financed, through the issuance of fresh bonds on governmental level. However, it must be noted that while a budget deficit is considered to be a flow, a government debt amounts to a stock. In fact, government debts are nothing but an accrued flow of budget deficits.

The definition of a budgetary deficit essentially evolves from that of governmental debt. When governmental debt is defined as the total amount owned by somebody, budget deficit refers to the amount by which savings enhances or a governmental debt develops. In fact, a practical example will clearly reveal the relationship existing between budget deficit and governmental debt:

Before the war in Iraq, the Americans had a common tendency of mixing up the two different concepts of budget deficit and government debt. This made them believe that the U.S. government was under pressure of a huge budgetary deficit. The actual situation was that the American government was in possession of a substantial budget surplus. The deficit which actually existed in United States of America had in fact, worn out during 1998-2001. This has made the American population believe that the budgetary deficits have increased remarkably than it was earlier, when the condition was that there was sufficient surplus, even without the funds gathered from the Social Securities programs.

Budget deficit and Debt formula:

Calculation of budgetary deficit is dependent on the following formula:To calculate a debt D, the formula used is:

D = RBt - 1 + Gt(r - g) - Tt ,
where, R= real rate of interest
Bt - 1= debt of the previous year
r=rate of interest
g= rate of growth
Gt= government expenses
and, Tt= tax revenue

However, the budget deficit of every country has its individual factors responsible for such situation to arise, hence varies worldwide. This is precisely why the rising development of Chinese and Indian economies directly unfolds the inflationary impacts, which results from the financial deficits in the two Asian countries.

Different types of budget deficits:
  • Early Budget Deficit: This prevailed prior to the invention of bonds. At that time, such deficits could only be funded with loans taken from either foreign nations or private financiers. The Rothschild dynasty ruling during the late 18th and early 19th century is a prominent historical example of such budget deficits.

However, with passing time, these deficits or loans gained popularity in the hands of private investors, who started to accrue sufficient capital to meet their expenses at a time when the government became incapable of printing paper currencies, owing to subsequent inflation.

A permanent loan or deficit is associated with sufficient risk factors for the lenders. At a later stage, attempts were made on governmental levels to do marketing of such deficits or debts by issuance of bonds, payable to the bondholders or bearers, instead of the actual buyers. This indicates that such debts are saleable, provided a person lends it to the other through state money. This simultaneously brings about a reduction in overall rates of interest as well as the risks associated with the entire process. The American Treasury bill bonds and the British Consols are the most popular and best instances of Early Budget Deficits or bonds.

  • Cyclical Budget Deficits: At the basic level of the commercial cycle, the rate of unemployment is pretty high. On the contrary, unemployment is low at the pinnacles of the commercial cycle. This enhances tax revenue and leads to a fall in the expenditure associated with social security. Cyclic Deficit refers to the urgency to borrow money at the lowest point of the commercial cycle, which is paid back completely by a cyclic surplus existing at the highest levels of the business cycle.
  • Structural Budget Deficits: This refers to the deficit existing across the commercial cycle. Such budget deficit prevails when the general government expenses exceed the existing levels of tax.
Conclusion:

However in case of both Cyclic and Structural Budget Deficit, the visible total deficit is equivalent to the sum of either the deficits or their surplus. This topic is severely criticized by economists who believe that the commercial cycle is very difficult to calculate and determine .

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