A budget deficit is when spending exceeds income. The term applies to governments, although individuals, companies, and other organizations can run deficits.
A deficit must be paid. If it isn’t, then it creates debt. Each year’s deficit adds to the debt. As the debt grows, it increases the deficit in two ways. First, the interest on the debt must be paid each year. This increases spending while not providing any benefits. Second, higher debt levels can make it more difficult to raise funds. Creditors become concerned about the borrower’s ability repay the debt. When this happens, they demand higher interest rates to provide a greater return on this higher risk.
That further increases each year’s deficit.
The opposite of a budget deficit is a surplus. It occurs when spending is lower than income. A budget surplus allows for savings. If the surplus is not spent, it is like money borrowed from the present to create a better future. If a deficit is financed by debt, then it has the opposite effect. It is money borrowed from the future to pay for the present standard of living.
A balanced budget is when revenues equal spending. Most U.S. states must balance their budgets. The federal government does not have that restriction.
Many situations can cause spending to exceed revenue. An involuntary job loss can eliminate revenue. Sudden medical expenses can quickly send spending skyward. Spending can easily outpace revenue if the consequences of debt aren’t too painful. That occurs in the early stages of credit card debt. The debtor keeps charging, and only paying the minimum payment. It’s only when interest charges become excessive that overspending becomes too painful.
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