Balanced Budget, Deficit, and Surplus - Explained
What is a Budget Deficit?
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Table of ContentsWhat is a Balanced Budget?What is a Budget Deficit?What is a Budget Surplus? Why the Budget Deficit is ImportantThe Danger of Budget DeficitsStrategies to Reduce Budget DeficitsReal-World Example
What is a Balanced Budget?
A budget deficit is an accounting situation that happens when expenses exceed income. Individuals, corporate organizations and even the government can experience budget deficit, it means more money was spent than earned. A budget deficit usually reflects in the financial statement, it is an indicator that there were fewer revenues recorded for the year but more expenses.
What is a Budget Deficit?
What is a Budget Surplus?
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Why the Budget Deficit is Important
A budget deficit creates an accounting loss, it shows that no gain was recorded, rather, expenses were more than the money earned. Individuals, corporate organizations and the government take diverse measures to reduce the budget deficit. The most common ways to tackle this situation is through reduced spending and a higher income. Reducing expenditures and engaging in activities targeted at generating revenue help to reduce our correct the amount of deficit that occurs in a budget. Furthermore, there are certain activities that can increase a budget deficit, this includes heavy borrowing. The largest budget deficits were recorded in the 20th century, this was when most countries had greater expenditures than their revenue. Here are the important points to know about a budget deficit:
- A budget deficit occurs when expenses (expenditures) exceed income (revenue).
- A Budget surplus is the opposite of a budget deficit, this occurs when revenue exceeds expenses.
- Individuals, organizations and governments can have a budget deficit.
- There are some measures that can control a budget deficit, these are increased revenue and reduction in expenditure.
The Danger of Budget Deficits
A budget deficit poses a lot of dangers to a country, a corporation or an individual when it occurs. One major danger of Budget deficit is inflation which in the long run will cause a recession. A prolonged budget deficit is bad for an economy, this is why governments devise several strategies to control budget deficits.
Strategies to Reduce Budget Deficits
Ultimately, corporations and governments want to control our reduce budget deficits. Some of the strategies that help control budget deficits are;
- Reducing government spending and expenditure.
- Increasing government revenue, this can be achieved through fiscal policies such as increasing taxes paid to the government.
- Printing of additional currency, in order to have more circulation of money in the country and settle all debts.
- Boosting business confidence through fewer regulations.
There are certain activities that can cause budget deficits, a good example was during the World War when governments engaged in heavy borrowing to finance the war. This action was also backed up by a depletion of the federal reserves to facilitate the war, this caused budget deficits which lasted till the 1960s for most countries. Defense spending during terrorism attacks can also lead to budget deficits. The United States spent heavily on defense after the September 11 terror attacks which caused a budget deficit. A budget deficit is presented as a percentage of the GDP of a country.
- Fiscal Policy
- Expansionary vs Contractionary Fiscal Policy
- Stabilization Policy
- Robin Hood Effect
- Ricardo Barro Effect
- Autonomous Spending
- Autonomous Consumption
- Golden Rule
- Ricardian Equivalence
- Balanced Budget - Deficit and Surplus
- National Debt
- Standardized Employment Budget
- Deficit Hawk
- Twin Deficits