Fiscal Deficit
A fiscal deficit (also called a budget deficit) occurs when a government's total expenditures exceed its total revenues in a given period, usually a fiscal year. The deficit is the gap that must be financed, typically through borrowing. It is the opposite of a fiscal surplus.[1]
Definition
A fiscal deficit arises when government spending—on goods and services, transfer payments, and interest on debt—exceeds government revenue from taxation and other sources. The deficit is normally expressed as a percentage of gross domestic product to allow comparison across countries and over time.[1]
Types
| Type | Description |
|---|---|
| Structural deficit | The deficit that would exist even if the economy were at full employment. |
| Cyclical deficit | The portion of the deficit caused by the state of the business cycle. |
| Primary deficit | The deficit excluding interest payments on existing debt. |
Financing and consequences
Governments finance deficits by issuing government bonds. Persistent deficits raise the national debt and the cost of servicing it. The economic consequences of deficits depend on their size, their cause, and how the borrowed funds are used:
- Deficits used to finance productive investment may raise long-run growth.
- Deficits used to finance current consumption may burden future generations.
- Large deficits may crowd out private investment by raising interest rates.
- Deficits can provide needed stimulus during a recession.
The appropriate level of the deficit is debated among economists, with views ranging from the Keynesian emphasis on using deficits to fight downturns to the concern that persistent deficits undermine long-term fiscal sustainability.[1]