budget deficit


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Budget deficit

The amount by which government spending exceeds government revenues.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

budget deficit

the excess of GOVERNMENT EXPENDITURE over government TAXATION and other receipts in any one fiscal year. See BUDGET (government). The operation of a budget deficit (deficit financing) is a tool of FISCAL POLICY to enable government to influence the level of AGGREGATE DEMAND and EMPLOYMENT in the economy. Such a policy was advocated by KEYNES in the 1930s to offset the DEPRESSION that occurred at that time. Opinion prior to this was that the government should operate a BALANCED BUDGET policy, allowing the economy to respond in its own way without government intervention. Keynes argued that government should intervene by deliberately imbalancing its budget in order to inject additional aggregate demand into a depressed economy and vice-versa.

Since the Second World War, most western governments have tended to operate a budget deficit to keep employment high and to promote long-term ECONOMIC GROWTH. This has been financed by increasing the PUBLIC SECTOR BORROWING REQUIREMENT (PSBR) through the issue of TREASURY BILLS and long-term bonds. This is acceptable as long as the economy is growing and the interest payments on such borrowings do not become disproportionate to the overall level of government expenditure. Government borrowing in excess of the amount required to promote long-term growth and effect counter-cyclical policies will ultimately result in INFLATION. Consequently, both the timing and magnitude of the expenditure over and above receipts is of crucial importance. In more recent times recognition that low inflation is necessary to secure low UNEMPLOYMENT has led to an acceptance of the need for ‘fiscal stability’. This has found expression, for example, within the European Union's MAASTRICHT TREATY limits of a current budget deficit of no more than 3% of GDP and a total outstanding government debt limit of no more than 60% of GDP.

BUDGET SURPLUS is the opposite of the above whereby there is an excess of government receipts over expenditure. See AUTOMATIC ( BUILT-IN) STABILIZERS, KEYNESIAN ECONOMICS, BUSINESS CYCLE, DEMAND MANAGEMENT.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
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