Budget Deficit and Debt
Mouse-over a link for a quick definition or click to read more in-depth!
Budget balances, surpluses, deficits, and debt
- Budgetary balances:
- The amount a government spends minus the amount it collects over a given period of time.
- Every government has the power to collect taxes and spend money. That which it collects is called government receipts and that which it spends is called government disbursements. The budgetary balance is total government receipts minus total government disbursements for a given period of time. This is also called net lending.
- For example Budgetary balance for 2007 = Receipts in 2007 - Disbursements in 2007
- Whenever the government spends less than it collects for a given year, it is running a budget surplus.
- Receipts > Disbursements
- Budgetary balance > 0
- Whenever the government spends more then it collects for a given year then it is running a budget deficit.
- Receipts < Disbursements
- Budgetary balances < 0
- A government’s debt is the summation of all its previous years’ deficits and surpluses.
- GDP ratios
- Budgetary balances and debt are often expressed in terms of percentage of GDP. To derive this you simply divide the budgetary balance or the debt by GDP for a given year and multiply by 100. The outcome it called the deficit to GDP ratio and the debt to GDP ratio respectively.
- The debt to GDP ratio provides an indication of how much of this year’s production a country would have to give up in order to pay off its debt. This can and has been above 100%, meaning that if a country took all it produced in a year and used it to pay its debt, there would still be a debt left to pay.
- How does a county run a deficit?
- When a country runs a budget deficit it must borrow the money that it used in excess of what it collected in taxes for that time period. The most common way a government borrows money is by issuing government bonds.
- Government bonds are IOU’s; the purchaser of the bond gives money to the government now with a promise that the government will pay him/her back plus interest at some specified date in the future.