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Encyclopedia > Deficit
Public finance
This article is part of the series:
Finance and Taxation
Taxation
Income tax  ·  Payroll tax
CGT ·  Stamp duty  ·  LVT
Sales tax  ·  VAT  ·  Flat tax
Tax, tariff and trade
Tax haven
Tax incidence
Tax rate  ·   Proportional tax
Progressive tax  ·   Regressive tax
Tax advantage

Economic policy
Monetary policy
Central bank  ·   Money supply
Gold standard
Fiscal policy
Spending  ·   Deficit  ·   Debt
Policy-mix
Trade policy
Tariff  ·   Trade agreement
Finance
Financial market
Financial market participants
Corporate  ·   Personal
Public  ·   Regulation
Banking
Fractional-reserve
Full-reserve  ·   Free banking
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A budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite of a budget deficit is a budget surplus. Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock. Not to be confused with Political economy. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... For other uses, see Gold standard (disambiguation). ... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Government spending or government expenditure consists of government purchases, which can be financed by seigniorage (the creation of money for government funding, at a heavy price of high inflation and other possibly devastating consequences), taxes, or government borrowing. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Government debt (also known as public debt or national debt) is... This article does not cite any references or sources. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        For other uses of this word, see tariff (disambiguation). ... A trade pact is a wide ranging tax, tariff and trade pact that usually also includes investment guarantees. ... Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Fractional-reserve banking refers to a financial system in which some fraction of the deposits can be used to finance profitable but illiquid investments. ... Full-reserve banking is a theoretically conceivable banking practice in which all deposits, banknotes, and notes in a financial system would be backed up by assets with a store of value. ... Please wikify (format) this article or section as suggested in the Guide to layout and the Manual of Style. ... Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law (Sharia) principles and guided by Islamic economics. ... This article is about the concept of an entity. ... For other uses, see Money (disambiguation). ... Surplus means the quantity left over, after conducting an activity; the quantity which has not been used up, and can refer to: budget surplus, the opposite of a budget deficit economic surplus Surplus product or surplus value in Marxian economics physical surplus in the economic theory of Piero Sraffa Operating... A stock in business and social accounting refers to the value of an asset at a balance date (or point in time), while a flow refers to the total value of transactions (sales or purchases) during an accounting period. ... A stock in business and social accounting refers to the value of an asset at a balance date (or point in time), while a flow refers to the total value of transactions (sales or purchases) during an accounting period. ...


An accumulated deficit over several years (or centuries) is referred to as the government debt. Government debt is usually financed by borrowing, although if a government's debt is denominated in its own currency it can print new currency to pay debts. Monetizing debts, however, can cause rapid inflation if done on a large scale. Governments can also sell assets to pay off debt. Most governments finance their debts by issuing long-term government bonds or shorter term notes and bills. Many governments use auctions to sell government bonds. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Government debt (also known as public debt or national debt) is... A government bond is a bond issued by a national government denominated in the countrys own currency. ...


Governments usually must pay interest on what they have borrowed. Governments reduce debt when their revenues exceed their current expenditures and interest costs. Otherwise, government debt increases, requiring the issue of new government bonds or other means of financing debt, such as asset sales. A government bond is a bond issued by a national government denominated in the countrys own currency. ...


According to Keynesian economic theories, running a fiscal deficit and increasing government debt can stimulate economic activity. Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ...

Contents

Primary deficit, total deficit, and debt

Main article: Primary deficit

The government's deficit can be measured with or without including the interest it pays on its debt. The primary deficit is defined as the difference between current government spending and total current revenue from all types of taxes. The total deficit (which is often just called the 'deficit') is spending, plus interest payments on the debt, minus tax revenues.[1] Government spending or government expenditure consists of government purchases, which can be financed by seigniorage (the creation of money for government funding, at a heavy price of high inflation and other possibly devastating consequences), taxes, or government borrowing. ... “Taxes” redirects here. ...


Therefore, if Gt is government spending and Tt is tax revenue, then

Primary deficit = GtTt

If Dt − 1 is last year's debt, and r is the interest rate, then

Total deficit = Gt + rDt − 1Tt

Finally, this year's debt can be calculated from last year's debt and this year's total deficit:

Dt = (1 + r)Dt − 1 + GtTt

Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.


Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive.


Structural deficits, cyclical deficits, and the fiscal gap

Main article: Structural deficit

A government deficit can be thought of as consisting of two elements, structural and cyclical. Structural deficit forms part of the public sector deficit. ...


At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g. on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The additional borrowing required at the low point of the cycle is the cyclical deficit. By definition, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of the cycle. The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. ... CIA figures for world unemployment rates, 2006 Unemployment is the state in which a person is without work, available to work, and is currently seeking work. ... Structural deficit forms part of the public sector deficit. ...


The structural deficit is the deficit that remains across the business cycle, because the general level of government spending is too high for prevailing tax levels. The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus. Structural deficit forms part of the public sector deficit. ...


The idea of cyclical vs. structural deficits has come under criticism by those economists who believe that the business cycle is too difficult to measure to make cyclical analysis worthwhile.


A concept related to the structural deficit is the fiscal gap, defined by economists Alan Auerbach and Lawrence Kotlikoff. It refers to the shortfall in government revenues over the very long term.[2] It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone.


National budget deficits (2004)

National Government Budgets for 2004 (in billions of US$)
Nation GDP Revenue Expenditure Exp / GDP Budget Deficit[3] Deficit / GDP[3]
US (federal) 11700 1862 2338 19.98% -25.56% -4.07%
US (state) - 900 850 7.6% +5% +0.4%
Japan 4600 1400 1748 38.00% -24.86% -7.57%
Germany 2700 1200 1300 48.15% -8.33% -3.70%
United Kingdom 2100 835 897 42.71% -7.43% -2.95%
France 2000 1005 1080 54.00% -7.46% -3.75%
Italy 1600 768 820 51.25% -6.77% -3.25%
China 1600 318 349 21.81% -9.75% -1.94%
Spain 1000 384 386 38.60% -0.52% -0.20%
Canada (federal) 900 150 144 16.00% +4.00% +0.67%
South Korea 600 150 155 25.83% -3.33% -0.83%

This data is from 2004, the year of the largest US federal deficit on record, totalling $552 billion (the figure does not include money borrowed from the Social Security trust fund — in other words, the fiscal gap is larger than this). This article is about budget deficits. ...


The deficits for any given period can be easily found on the website for the US Bureau of the Public Debt, now under treasury.gov. (Data from CIA Factbook and List of countries by GDP (nominal), senate.gov, nasbo.org) World map of GDP (Nominal and PPP). ...


Early deficits

Before the invention of bonds, the deficit could only be financed with loans from private investors or other countries. A prominent example of this was the Rothschild dynasty in the late 18th and 19th century, though there were many earlier examples. For alternative meanings, see bond (a disambiguation page). ... Mayer Amschel Rothschild (1744-1812) Mayer Amschel Rothschild (February 23, 1744 – September 19, 1812) was the founder of the Rothschild family banking empire that would become one of the most successful business families in history. ...


These loans became popular when private financiers had amassed enough capital to provide them, and when governments were no longer able to simply print money, with consequent inflation, to finance their spending. For other uses, see Money (disambiguation). ...


However, large long-term loans had a high element of risk for the lender and consequently gave high interest rates. Governments later tried to marketize their debts by issuing bonds that were payable to the bearer, rather than the original purchaser. This meant that someone who lent the state money could sell on the debt to someone else, reducing the risks involved and reducing the overall interest rates. Examples of this are British Consols and American Treasury bill bonds. Consols (short for consolidated annuities[]) are a form of British government bond (gilt), dating originally from the 18th century. ... Treasury Securities are bonds issued by the U.S. Federal Reserve. ...


Miscellaneous

The Ricardian equivalence hypothesis, named after the English political economist and Member of Parliament David Ricardo, states that because households anticipate that current public deficit will be paid through future taxes, those households will accumulate savings now to offset those future taxes. If households acted in this way, a government would not be able to use fiscal policy to stimulate the economy. The Ricardian equivalence result requires strong modelling assumptions. For example, the result requires that households act as if they were infinite-lived dynasties. Empirical evidence on Ricardian equivalence effects has been mixed. Ricardian equivalence, or the Barro-Ricardo equivalence proposition, is a controversial economic theory which suggests that government budget deficits do not affect the total level of demand in an economy. ...


See also

This article does not cite any references or sources. ... Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... This article or section does not cite its references or sources. ... Government spending or government expenditure consists of government purchases, which can be financed by seigniorage (the creation of money for government funding, at a heavy price of high inflation and other possibly devastating consequences), taxes, or government borrowing. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Government debt (also known as public debt or national debt) is... A government budget is a legal document that is often passed by the legislature, and approved by the chief executive. ... “Taxes” redirects here. ... Historically, the United States government has tended to spend more than it takes in, with national debt that was close to $1 billion at the beginning of the 20th century. ... This table lists the change in the United States public debt divided by Gross Domestic Product listed by Presidential term. ... Starve-the-beast is a strategy of encouraging public budget deficits in order to force the government to reduce its spending. ... The U.S. public debt, commonly called the national debt or the gross federal debt, is the amount of money owed by the United States federal government. ...

References

  1. ^ Michael Burda and Charles Wyplosz (1995), European Macroeconomics, 2nd ed., Ch. 3.5.1, p. 56. Oxford University Press, ISBN 0198774680.
  2. ^ http://www.aarp.org/research/blueprint/overstatedproblem/the_fiscal_gap.html AARP article on the fiscal gap
  3. ^ a b In this column, a negative number represents a deficit, and a positive number represents a surplus.

Current logo for AARP, in use since January 2007 For the AppleTalk protocol developed by Apple Computer, see AppleTalk address resolution protocol (AARP). ...

External links

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  Results from FactBites:
 
Deficit - Wikipedia, the free encyclopedia (702 words)
The size of a governmental budget deficit is often an important political issue as well as one of economic policy.
A structural deficit is the deficit that remains across the business cycle, because general tax levels are too low for the general level of government spending.
The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus.
Deficit spending - Wikipedia, the free encyclopedia (1176 words)
Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus.
But government deficits are not the only cause of inflation: it can arise due to such supply-side shocks as the "oil crises" of the 1970s and inflation left over from the past (inflationary expectations and the price/wage spiral).
If the government borrows (runs a deficit) to deal with a severe recession (or depression), to help self-defense, or is spent on public investment (in infrastructure, education, basic research, or public health), the vast majority of economists would agree that the deficit is bearable, beneficial, and even necessary.
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