Deficit

A budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite is a budget surplus.

Total budget deficit = Structural deficit + Cyclical deficit

The size of a governmental budget deficit is often an important political issue as well as one of economic policy. Fiscal conservatives denounce deficit spending and advocate balanced budgets. Keynesians argue that under some circumstances, deficit spending is justified. "Starve-the-beast" strategies usually lead to high budget deficits.

An accumulated deficit over several years (or centuries) is referred to as the government debt. Often, a certain part of spending is dedicated to paying of debt with certain maturity, which can be refinanced by issuing new government bonds. That is, a fiscal deficit leads to an increase in an entity's debt to others.

Any deficit must, ultimately, be repaid, either through taxation, or seignorage. The Ricardian equivalence hypothesis states that this means a public deficit is exactly the same as a tax rise.

The existence of a deficit has in some cases led to the existence of a capital market and been a great benefit to economic activity.

1 Early Deficits
2 The United States
- 2.1 Related U.S. legislation
- 2.2 Related articles
3 References
4 External links

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Early Deficits

Before the invention of bonds, the deficit could only be financed with loans from private investors. A prominent example of this was the Rothschild dynasty in the late 18th and 19th century, though there were many earlier examples.

These loans became popular when private financiers had amassed enough capital to provide them, and when governments were no longer able to simply print money, with consequent inflation, to finance their spending.

However, large, long-term loans had a high element of risk for the lender and consequently gave high interest rates. Governments later tried to marketize their debts by issuing bonds that were payable to the bearer, rather than the original purchaser. This meant that someone who leant the state money could sell on the debt to someone else, reducing the risks involved and reducing the overall interest rates. Examples of this are British Consols and American Treasury bill bonds.

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The United States

Historically, the United States government has tended to spend more than it takes in, with national debt that was close to $1,000,000,000 at the beginning of the 20th century. The budget for most of the 20th century followed a pattern of deficits during wartime and economic crises, and surpluses during periods of peacetime economic expansion. This pattern broke from fiscal years 1970 to 1997; although the country was nominally at peace during most of this time, the federal budget deficit accelerated, topping out (in absolute terms) at $290 billion for 1992. In 1998 - 2001, however, gross revenues exceeded expenditures. Subsequently the budget has returned to a deficit basis; the estimated U.S. deficit for fiscal year 2005 was $319 billion.

As a percentage of the gross domestic product (GDP), within the context of the national economy as a whole, the highest deficit was run during fiscal year 1943 at over 30% of GDP, whereas deficits during the 1980s reached 5-6% of GDP and the deficit for 2005 was 2.6% of GDP, close to the post-World War II average.

An issue about counting so-called "off-budget" items such as Social Security, which are presently running a large surplus, complicates discussion of budget deficits, as do the inevitable attempts by the party in power to downplay the deficit, while the other party exaggerates it. Nonetheless, the Social Security Administration does not see a large surplus -- while it is an example of an "off-budget" item, its own financial woes are generally recognized by experts on both sides of the aisle.

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