Budget Deficit: Types and Causes

Budget Deficit: Types and Causes

In governance and economics, a budget deficit is a situation in which a particular government occurs expenses that exceed its revenues. Instances and frequencies of deficits can be an indicator of the overall financial health of a country, including its capacity to pay off its debts, as well as the leadership capabilities of elected and appointed government officials.

The opposite of deficit is budget surplus. Hence, a surplus occurs when the revenue of the government exceeds its current expenses, thereby resulting in having excess funds that can be stashed in the national coffers or allocated to public projects.

A country that intends to resolve its deficit may resort to cutting back its expenses by reviewing its priorities, increasing revenue-generating activities such as improving tax collection and optimizing the operations of state-owned enterprises, increasing taxes or introducing additional forms of taxes, or employing a combination of the three.

Three Major Types of Budget Deficit

There are three types of budget deficit. These are revenue deficit, fiscal deficit, and primary deficit. Each has been categorized and is differentiated based on how the deficit has been calculated or determined.

Below are the concise definitions:

1. Revenue Deficit: The excess of total revenue expenditures over the total revenue receipts. It fundamentally represents the shortfall of all the revenue receipts versus the total revenue expenditure and indicates that the earnings of the government are not enough to finance its normal functions and delivery of services.

This is calculated as Revenue Deficit = Total Expenditure – Total Revenue Receipts.

2. Fiscal Deficit: The excess of total expenditures over total receipts, excluding the borrowings in a given fiscal year. It represents the amount the government needs to borrow to meet all of its expenses or finance its functions and service deliveries. A large fiscal deficit means a large amount of borrowing.

This is calculated as Fiscal Deficit = Total Expenditures – Total Receipts Excluding Borrowings.

3. Primary Deficit: The difference between the fiscal deficit of the current year and interest payments on previous borrowings. This represents the amount the government needs to borrow exclusive of interest payment. Note that fiscal deficit includes interest payments. A lower or zero primary deficit indicates that the government needs to borrow only to meet interest commitments on previous borrowings.

This is calculated as Primary Deficit =  Fiscal Deficit – Interest Payments

Two Major Causes of Budget Deficit

Understanding the specific causes of a deficit in a particular country will require evaluating all the policies in place, the socioeconomic programs or agenda of the current administration, its macroeconomic health, and external factors such as the state of the global economy and international trade. However, there are two major causes of budget deficit.

Take note of the following definitions:

1. Cyclical Budget Deficit: Occurs as a natural consequence of a specific phase of the business cycle. To be specific, during periods of temporary low economic activity or recession, the revenues of a government often fall due to lower business profits, a decrease in demand due to low consumption activity, and unemployment.

2. Structural Budget Deficit: Transpires due to the structural imbalance between government spending and government revenue. Hence, in other words, this type of budget deficit occurs not because of temporary low economic activity or a brief period of recession or low real GDP but because of budget mismanagement.

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