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A fiscal deficit refers to the shortfall in a government's revenue compared to its spending during a certain period. When a country runs a fiscal deficit, it means the government spends beyond its means. Fiscal deficits are calculated either as a percentage of a country's gross domestic product (GDP) or by determining the amount of spending over revenue. Fiscal deficits are different from fiscal debts and fiscal imbalances. They are also the opposite of fiscal surpluses.
A fiscal deficit, which is also commonly called a national deficit, occurs when a country's government spends more money than it earns during the fiscal year. This means that more money goes out compared to how much comes in. Therefore, spending exceeds revenue. Governments may boost spending for social programs like Social Security and healthcare or for other things like military spending and infrastructure.
The size of a fiscal or national deficit depends entirely on a few factors, including:
Governments often run deficits when there are signs of a distressed economy. For instance, they may reduce taxes or increase spending to encourage consumer spending or boost economic activity. This typically happens when there is inflationary pressure or the economy is going through a recession. A government that needs more money than it can spend typically borrows money from the public or other governments.
Deficits are normally calculated and reported as a percentage of a company's GDP. It may also be reported as a dollar figure or a country's revenue (or income) less spending. As noted above, when spending exceeds revenue or income, it results in a negative balance or a fiscal deficit.
The income figure used to calculate a country's fiscal deficit (or surplus) includes only taxes and other revenues. It does not include money borrowed to make up the shortfall.
A fiscal deficit is not universally regarded as a negative event. For example, the influential economist John Maynard Keynes argued that deficit spending and the debts incurred to sustain that spending can help countries climb out of economic recession.
Fiscal conservatives, on the other hand, generally argue against deficits. Rather, they favor of a balanced budget policy where spending equals revenue, leaving neither a deficit nor a surplus.
Don't confuse the term fiscal deficit with fiscal debt or fiscal imbalance. The three are very different concepts.
Remember, a fiscal deficit means the government spends more than it earns in revenue. The term fiscal debt is also called a national debt. A fiscal debt, on the other hand, is the total amount of debt that a government owes to its creditors. Governments often borrow money to pay for certain expenditures, including infrastructure and social programs.
A country's fiscal debt is accumulated over years of deficit spending and is composed of different types of debt, including:
As of Aug. 12, 2024, the U.S. government's fiscal debt was roughly $35.13 trillion. Of this figure, $27.99 trillion was held by the public while over $7.13 covered intragovernmental holdings.
Fiscal deficits are also different from fiscal imbalances. A fiscal imbalance is a measure of the difference between future debt obligations and future revenue streams. This means that a country's future debt isn't in line with its future revenue.
Fiscal imbalances happen when a country's spending isn't able to keep up with its ability to earn revenue to fund its spending and debt obligations over the long term.
A fiscal deficit is the opposite of a fiscal surplus, which is also called a national surplus or a budget surplus. A surplus occurs when a country's government's revenue exceeds its spending. Governments with budget surpluses can use the extra cash to fund new investments or to pay off their financial obligations.
Since World War II, the U.S. government has run at a fiscal deficit in most years. But the budget hasn't been in the red for the entire history of the U.S., as there have been times when the government ran a surplus.
The next federal surplus did not occur until 1998 when President Bill Clinton reached a landmark budget deal with Congress that resulted in a $70 billion surplus. The surplus grew to $236 billion in 2000. President George W. Bush benefited from a $128 billion carryover of the Clinton surplus in 2001.
The United States government has run fiscal deficits since the nation declared independence. Alexander Hamilton, the first Secretary of the Treasury, proposed issuing bonds to pay off the debts incurred by the states during the Revolutionary War.
At the height of the Depression, President Franklin D. Roosevelt holds the record for the fastest-growing U.S. fiscal deficits. The New Deal policies designed to pull America out of the Great Depression, combined with the need to finance the country's entry into World War II, drove the federal deficit from 4.5% of GDP in 1932 to 26.8% in 1943. He also issued the first U.S. savings bonds to encourage Americans to save more and, not incidentally, finance government spending.
Let's look at some of the deficits following the 2007-2008 financial crisis:
Deficits and debt are two different concepts. A fiscal deficit refers to the negative difference between a country's revenue and spending. A country runs a deficit when its spending exceeds its revenue. A fiscal debt, on the other hand, is money that a government owes to a creditor. Governments typically owe money to the public or other countries.
The United States has typically run fiscal deficits. But, there have been four fiscal surpluses since 1974. The most recent surplus was in 2001.
Fiscal deficits aren't necessarily a bad thing. Running a fiscal deficit can help governments boost economic activity. For instance, they can spend money on social programs and infrastructure when unemployment is high. Boosting government spending can also put more money into consumers' pockets and encourage them to spend, as is the case with stimulus checks during tough times.
But, critics suggest running fiscal deficits over very long periods can be detrimental to a country's economy and overall well-being.
When government spending equals revenue, the result is a balanced budget. This means there is neither a deficit nor a surplus. Budgets are generally considered balanced after a full year of revenues and expenses are recorded. Supporters of balanced budgets say they help protect social programs like Social Security for future generations while critics say it could derail the economy when the government needs to increase spending.
A fiscal deficit is the negative difference between a country's revenue and spending. This means a government ends up with a deficit when they spend more than it earns in revenue. Although it has a negative connotation, running a deficit isn't always bad. It can help pull a country out of an economic slump and encourage consumers to spend more. But, long-term deficits may affect the overall health and well-being of a nation's economy, so policymakers should be mindful of loosening the pursestrings over the long term.
Article SourcesThe International Finance Corporation (IFC) is an organization dedicated to helping the private sector within developing countries.
A fiscal imbalance is a situation that occurs when future income streams for government units don't balance the future debt and spending obligations.
In financial planning or the budgeting process, a balanced budget means that revenues are equal to or greater than total expenses.
The debt ceiling is a limit that Congress imposes on the amount that the federal government can owe. Discover the current debt ceiling and its economic impact.
Fiscal drag refers to a situation where increased taxes lead to a decrease in consumer spending, resulting in a drag on the economy.
Financial repression is a term that describes measures by which governments channel funds to themselves as a form of debt reduction.
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