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?

A budget deficit is simply when the Government budget (spending) is greater than the amount of revenue collected by the Government (taxes). The shortfall of tax revenue to cover the spending budget is made up for by government borrowing. 

What is a Budget Surplus? 

A government budget surplus is the opposite of a deficit. If the government brings in more revenue through taxes than they spend in their budget, then there is a budget surplus. Surpluses often result in additional spending or lower tax rates. 

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.

Real-World Example

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.

Related Topics

• What is Government Spending?
• Autonomous Spending
• Autonomous Consumption
• Fiscal Policy
• Expansionary Fiscal Policy
• Contractionary Fiscal Policy
• Progressive vs Regressive Tax
• Marginal Tax Rates
• Proportional Tax
• Trickle Down Theory
• Discretionary Fiscal Policy
• Automatic Stabilizers
• Effects of Discretionary Policy (Interest Rates & Lags)
• Crowding Out Effect 
• National Debt
• Government Borrowing
• Golden Rule
• Ricardian Equivalence
• Balanced Budget - Deficit and Surplus
• National Debt
• Standardized Employment Budget
• Deficit Hawk
• Austerity
• Twin Deficits
• Fiscal Policy and the Aggregate Supply and Demand Curve
• Stabilization Policy
• Robin Hood Effect
• Ricardo Barro Effect
• Automatic Stabilizers
• Standardized Employment Budget
• How Does Fiscal Policy Affect Interest Rates? 
• Crowding Out
• Types of Lag in Fiscal Policy
• Temporary and Permanent Fiscal Policy
• Limitations of Fiscal Policy?
• How Politics Affects Discretionary Fiscal Policy
• Government Borrowing
• National Savings and Investment Identity
• Debtor Nation
• Fiscal Policy Affects Trade Balances
• Twin Deficits
• Exchange Rates Affect Budget and Trade Deficits
• What are the risks of chronic large deficits in the United States?
• How Fiscal Policy Can Affect Trade Imbalances
• Government Borrowing Affect Private Savings
• Ricardian Equivalence
• Fiscal Policy Affects Investment and Economic Growth
• Crowding Out of Physical Capital Investment?
• How Does Government Borrowing Affect Interest Rates in Financial Markets?
• Government Investment in Physical Capital
• Public Investment in Human Capital
• Fiscal Policy Can Affect Technology Development

• Economic Cycle or Business Cycle
• Business Cycle Indicator
• Peak and Trough
• Recession and Depression
• Hard Landing vs Soft Landing
• Economic Bubble
• Boom and Bust Cycle
• Great Depression
• Baby Boomer Age Wave Theory

• Skyscrapper Effect (Economics)
• V-Shaped Recovery
• W-Shaped Recovery
• U-Shaped Recovery
• Kondratieff Wave Cycle
• Contagion
• Feedback Rule Policy
• American Customer Satisfaction Index
• CNN Effect
• Bureau of Economic Analysis
• Business Starts Index
• American Recover and Reinvestment Act
• Abenomics
• Emergency Economic Stabilization Act of 2008
• Commodity Credit Corporation
• Humphrey Hawkins Act

• Real Economic Growth Rate
• Fox-Trot Economy

• Stagnation
• Neoclassical Growth Theory
• Exogenous Growth Theory
• Endogenous Growth Theory
• New Growth Theory - Explained
• Classical Growth Theory - Explained
• Real Economic Growth Rate - Explained
• Plutonomy