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Deficit

Updated on April 9, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Deficit Meaning

A deficit occurs when a country’s imports are more than exports, an organization’s liabilities exceed assets, or its expenses exceed revenue. Sometimes businesses and governments run deficits purposely to revitalize an economy during a recession or to stimulate future growth.

Deficit

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Deficits are shortfalls or losses and can even occur when an individual spends more than what they earn for a certain duration. Running a deficit over the long term is unsustainable as it leads to increased debt, higher interest rates, and slower economic growth. Deficits can be of multiple types, such as fiscal, trade, and primary.

Key Takeaways

  • Deficit definition refers to the amount by which imports, liabilities, and expenses exceed exports, assets, and earnings. It is of various types — fiscal, primary, and trade.
  • Businesses and governments may record a shortfall purposely to boost economic recovery during a recession and generate employment. That said, recording a shortfall for a prolonged period can jeopardize long-term economic stability.
  • A deficit is a loss or shortfall, which is the opposite of a surplus.
  • Printing new currency to pay off debt is unsustainable for a government over the long term as it can lead to inflation.

Deficit Explained

Deficit definition refers to the shortfall of specific economic resources, primarily money. Individuals, organizations, or governments record shortfalls when their expenses exceed earnings in a particular timeframe, usually a year.

In other words, it is an excess of inflows over outflows. In some cases, governments and companies may deliberately incur deficits for various benefits. For example, running a deficit allows a government to generate employment during a recession and obtain more goods than the country produced in a year. Moreover, it allows a government to manipulate tax levels and allocations to stabilize the economy.

However, experts consider such deficits unsustainable as the continuous shortfalls can be detrimental to a country’s long-term economic stability. Indeed, recording a shortfall over a long duration increases debt, which a country repays using the current surplus.

Many experts believe that the government can utilize the available monetary resources more efficiently by offering education, housing, etc.

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Types

A deficit in economics is of various types. Let us look at some of them in detail.

#1 – Fiscal

A fiscal deficit arises when a government spends more money than it earns. The shortfall or loss is the amount the government must borrow to meet the additional expenses. There are various ways to raise funds for governments. For example, a government can borrow money from domestic, commercial banks, and international financial institutions. Moreover, it can raise funds from the public by offering bonds. Besides these, it can print new currency.

Running a fiscal shortfall poses multiple risks. A few of them are as follows:

  • Printing new currency to meet the debt requirements can lead to price inflation.
  • When a government borrows, it has to pay more interest. The interest payments increase government spending in subsequent periods and lead to a rise in future shortfalls. 

Also, the high dependence on debt can be detrimental to an economy’s growth over the long term.

#2 – Trade

When a country’s total imports exceed its exports, the difference is the trade deficit. It represents a country’s ability to access an extensive range of goods and services. Moreover, it indicates the availability of foreign products, which encourages domestic producers to improve the quality of their offerings. That said, recording a trade shortfall for a long duration can lead to the closure of multiple industries and, thus, a significant loss of employment. Moreover, it can severely impact a country’s future growth.

#3 – Primary

A primary deficit in economics is the value of a country’s fiscal shortfall minus the value of interest payments on past borrowings. The difference represents a government’s borrowing requirements for paying expenses other than interest payments. Moreover, the difference between fiscal and primary deficits shows the total interest on debt a government paid in the past.

Some other types of shortfalls are as follows:

  • Income: The United States Census Bureau utilizes this measurement to represent the difference between an individual or a family’s earnings and the poverty threshold.
  • Revenue: This occurs when a government’s revenue expenditure exceeds revenue receipts.
  • Twin: It arises when a country simultaneously has fiscal and current account shortfalls.

Examples

Let us look at a few deficit examples to understand the concept better.

Example #1

In August 2022, the White House estimated the fiscal deficit for 2022 to be $1.032 trillion, representing a $383 billion drop from the budget prediction in March. This indicates better-than-estimated revenues offset by new expenditures and technical re-estimates of various outlays, including healthcare.

The most significant part of the revised shortfall estimate for the fiscal year 2022 is a result of the $504 billion surge in revenue over levels predicted in March. The main reason for this is the higher individual tax receipts owing to the significant wage and job growth. Moreover, the higher excise and corporate taxes have also had an influence.

Example #2

Suppose Country A’s total imports and exports for the fiscal year 2020 stood at $70 billion and $45 billion, respectively. As a result, the country’s government recorded a trade deficit of $25 billion for that fiscal year.

Deficit vs Debt vs Surplus vs National Debt

Let us look at some vital distinguishing features of shortfalls, debt, surplus, and national debt.

#1 – Meaning

A deficit is an amount by which the expenses of a company or government exceed income. That said, a surplus is the complete opposite of a shortfall. One can compute surplus by deducting total expenses from total income.

Debt is the amount individuals, governments, and businesses borrow to cover expenses. On the other hand, the national debt is the total amount a country’s government owes its creditors.

#2 – Repayment

In the case of surplus and shortfall, there is no external party to whom a government or business owes money. Hence, they do not involve repayment. On the flip side, debt and national debt involve repayment as the borrower has to make principal and interest payments.

#3 – Consistency

The amount of national debt and an individual or a company’s borrowings changes over time as one adds to it or reduces it by making principal and interest payments to the creditor. In contrast, expenses and income can remain constant if a government carefully spends its money.

Lastly, one should remember that debt and national debt arise due to a shortfall. In other words, whenever there is a shortfall in a country’s yearly budget, its government takes on debt.

Frequently Asked Questions (FAQs)

1. How much is the US deficit?

In the fiscal year 2021, the United States federal government incurred expenses worth $6.82 trillion and recorded $4.05 trillion in earnings. Thus, the shortfall was the amount by which expenses exceeded earnings, i.e., $2.77 trillion.

2. Do deficits cause inflation?

Under the transaction cost economic theory of separate demands for bonds and money, increased shortfalls will not cause higher inflation via crowding out or monetary accommodation. Per this theory, bonds are nearly perfect substitutes for money owing to private monetization. Hence, deficits are directly inflationary.

3. Why deficit budget is a good budget?

Running on a shortfall allows a government to revitalize a sluggish economy providing citizens with more money to increase investment and purchases. Moreover, it generates more employment and enables the government to spread distortionary taxation over time.

4. Do deficits matter?

Shortfalls matter as debt accumulation over a long period can destabilize an economy and lower its growth rate.

This has been a guide to Deficit and its meaning. Here, we explain its types, examples, and comparisons with debt, surplus, and national debt. You may also find some useful articles here –

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