Government Budget Deficit

[stockbroker]

A government budget deficit is the amount by which some measure of government revenues falls short of some measure of government spending.


If a government is running a positive budget deficit, it is also said to be running a negative budget surplus (and conversely, a positive budget surplus is a negative budget deficit).

[stockbroker]

Primary deficit, total deficit, and debt

The meaning of 'deficit' differs from that of 'debt', which is an accumulation of yearly deficits. Deficits occur when a government's expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures.[1]
The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt.

Therefore, if t is a timeframe, Gt is government spending and Tt is tax revenue for the respective timeframe, then the primary deficit is



If Dt − 1 is last year's debt, and r is the interest rate, then the total deficit is



Finally, this year's debt can be calculated from last year's debt and this year's total deficit, as follows:



Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.

Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive.

Quoted