From Wikipedia, the free encyclopedia

Public finance
This article is part of the series: Finance and Taxation
Taxation
Income tax  ·   Payroll tax CGT  ·   Stamp duty Sales tax  ·   VAT  ·   Flat tax Tax, tariff and trade
Tax incidence
Tax rate  ·   Proportional tax Progressive tax  ·   Regressive tax Tax advantage
Taxation by country Australia British Virgin Islands Canada France Germany Hong Kong India Indonesia Netherlands New Zealand Peru Republic of Ireland Russia Singapore Tanzania United Kingdom United States European Union  v • d • e  Tax rates around the world Tax revenue as % of GDP
Economic policy
Monetary policy Central bank  ·   Money supply
Fiscal policy Spending  ·   Deficit  ·   Debt
Trade policy Tariff  ·   Trade agreement
Finance
Financial market Financial market participants Corporate  ·   Personal Public  ·   Banking  ·   Regulation
view • talk • edit • project

A budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite is a budget surplus. Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock.

An accumulated deficit over several years (or centuries) is referred to as the government debt. Government debt is usually financed by borrowing, although if a government's debt is denominated in its own currency it can print new currency to pay debts. Monetizing debts, however, can cause rapid inflation if done on a large scale. Governments can also sell assets to pay off debt. Most governments finance their debts by issuing long-term government bonds or shorter term notes and bills. Many governments use auctions to sell government bonds.

Governments usually must pay interest on what they have borrowed. Governments reduce debt when their revenues exceed their current expenditures and interest costs. Otherwise, government debt increases, requiring the issue of new government bonds or other means of financing debt, such as asset sales.

According to Keynesian economic theories, running a fiscal deficit and increasing government debt can stimulate economic activity.

Contents 1 Debt formula 2 Early deficits 3 Structural and cyclical deficits 4 Largest national budgets (2004) 5 Miscellaneous 6 See also 7 External links

A formula to calculate debt D at time t , is:

where r is the real interest rate, D_{t − 1} is last year's debt, G_t is government spending, T_t is tax revenue, and z_t are other government revenues such as tariffs.

However the fiscal deficit of each nation will have its own factors influencing. For example the booming growth of India and China will directly reflect on the inflation due to influences in fiscal deficit.

Before the invention of bonds, the deficit could only be financed with loans from private investors or other countries. 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 lent 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.

A government deficit can be thought of as consisting of two elements, structural and cyclical.

At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g. on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The need to borrow money at the low point of the cycle is a cyclical deficit. A cyclical deficit will be entirely repaid by a cycical surplus at the peak of the cycle.

A structural deficit is the deficit that remains across the business cycle, because the general level of government spending is too high for prevailing tax levels.

The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus.

The idea of cyclical vs. structural deficits has come under criticism by those economists who believe that the business cycle is too difficult to measure to make cyclical analysis worthwhile.

National Government Budgets for 2004 (in billions of US$)

Nation	GDP	Revenue	Expenditure	Exp / GDP	Budget Deficit	Deficit / GDP
US (federal)	11700	1862	2338	19.98%	-25.56%	-4.07%
US (state)	-	900	850	7.6%	+5%	+0.4%
Japan	4600	1400	1748	38.00%	-24.86%	-7.57%
Germany	2700	1200	1300	48.15%	-8.33%	-3.70%
United Kingdom	2100	835	897	42.71%	-7.43%	-2.95%
France	2000	1005	1080	54.00%	-7.46%	-3.75%
Italy	1600	768	820	51.25%	-6.77%	-3.25%
China	1600	318	349	21.81%	-9.75%	-1.94%
Spain	1000	384	386	38.60%	-0.52%	-0.20%
Canada (federal)	900	150	144	16.00%	+4.00%	+0.67%
South Korea	600	150	155	25.83%	-3.33%	-0.83%

(This data is from 2004, the year of the largest US federal deficit on record. Since that time, the size of the deficit has been cut, nearly in half.) (Data from CIA Factbook and List of countries by GDP (nominal), senate.gov, nasbo.org)

Ricardian equivalence hypothesis, named for the English political economist and Member of Parliament David Ricardo, states that because households anticipate that current public deficit will be paid through future taxes, those households will accumulate savings now to offset those future taxes. If households acted in this way, a government would not be able to use fiscal policy to stimulate the economy. The Ricardian equivalence result requires strong modelling assumptions. For example, the result requires that households act as if there were infinite-lived dynasties. Empirical evidence on Ricardian equivalence effects has been mixed.

• Fiscal Policy in the United States
• National debt by U.S. presidential terms
• Starve-the-beast philosophy
• U.S. public debt

• U.S. Congressional Budget Office
• Hong Kong Government Budget
• The Budget Graph: A graphical representation of the 2008 United States federal discretionary budget, including the public debt.
• United States - Deficit versus Savings rate from 1981 Historical graphical representation of the 12 month rolling Fiscal deficit versus the Savings rate of the United States. (since 1981)