What is Budget Deficit?
Where annual expenses of a budget exceeds the annual income of the budget then it is known as budget deficit indicating financial unhealthiness of a country which can be reduced by taking the attempts of different measures like reduction of revenue outflow and increasing revenue inflow.
Budget Deficit Formula
Budget Deficit = Total Expenditures by the Government − Total Income of the government
- Total income of the government includes corporate taxes, personal taxes, stamp duties, etc
- Total expenditure includes the expense in defense, energy, science, healthcare, social security, etc.
Budget Deficit Calculations
Recently, the US budget deficit climbed to $779bn, its highest since 2012. Let us calculate the budget deficit of the United States.
Total Income Breakup (US)
- Individual Income Tax = $1,684 billion
- Social Security and Other payroll taxes = $1,171 billion
- Corporate Income Taxes = $205 billion
- Other Taxes and Duties = $270 billion
Total Income (US) = $1,684 billion + $1,171 billion + $205 billion + $270 billion = $3,329 billion
Total Expenditure Breakup (US)
- Defense = $665 billion
- Social Security = $988 billion
- Medicare = $589 billion
- Interest on Debt = $325 billion
- Others = $1542 billion
Total Expenditure (US) = $665 billion + $988 billion + $589 billion + $325 billion + $1542 billion = $4,108 billion
- Budget Deficit = Total Expenditures by the Government − Total Income of the government
- US Budget Deficit = $4,108 billion – $3,329 billion = $779 billion
Causes of Budget Deficit
So, what are the factors that cause the budget deficit? Let’s have a quick glance at them.
#1 – Slow Economic Growth:
If a country’s economy isn’t going as fast as the government is spending money, the country can experience slow economic growth. Due to slow economic growth (due to inflation and other economic factors), the government doesn’t collect as much money as it planned. As a result, the government has to deal with the deficit.
#2 – High Government Spending:
If a government has been investing a lot of money into a particular project that would yield huge gains in the future, then for the current period it may create a deficit for the government. This is good if the government has spent the money on the sustainable growth of an investment or an infrastructure. But it’s futile if the expenses don’t ensure sustainable growth or the expenses are incurred just to support some unsustainable overheads.
#3 – High Unemployment Rate:
If a country is experiencing a high unemployment rate, then maybe the government needs to pay more subsidies toward that particular purpose. All efforts should be given to improving the unemployment rate so that the amount of subsidies can be reduced and at the same time the economic growth can be accelerated.
#4 – Combinations of the above Factors:
Excessive government spending may not happen due to one particular reason. It may happen that the combinations of all the factors become responsible for the deficit in a country. The government should make an effort to keep the expenses low and create more avenues to gather more revenues.
Is Government Budget Deficit Bad?
But do you think that the government deficit is always bad? No. Actually, to the investors and the financial analysts, there are two important factors that determine whether or not the government deficit is good for the country.
- The first factor is why government expenditure is so high. Is it because the government has invested in a particular infrastructure or invested the money in an investment that will yield high returns. If that’s the case financial analysts give a green signal to the government deficit. And if not, analysts mark them as poor expenditure.
- The second factor is the way the deficit or the national debt is impacting the country. We call it national debt because the government needs to borrow money to pay for some of the things due to lack of revenue.
- The effects of the deficit may be havoc on the country’s economic affairs. If the effect is mild, the deficit isn’t a problem and vice versa.
How to Reduce Government Budget Deficit?
There are only two ways to reduce the budget deficit. One is by increasing the amount of revenue. And two is to reduce spending.
However, for the government, it’s very tricky.
- The two significant ways to increase revenue for the government is to increase the tax percentage and to ensure economic growth. If the government increases tax too much, it would affect economic growth. And an economy cannot be improved drastically.
- To reduce expenses, the government needs to reduce expenditure. Reducing too many expenses will affect the economy of the country. Since government spending is a part of the country’s GDP, too much reduction will slow down economic growth.
- The idea is to understand the current state of affairs and then decide what actions can be taken in regard to the government deficit.
Budget Deficit Video
This has been a guide to what is Budget Deficit? Here we discuss the formula of budget deficit along with calculations and practical examples (calculation of US Budget deficit). Additionally, we see the causes of the deficit and the steps the government can take to reduce the same. You can learn more about Economics from the following articles –