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Fiscal Deficit

When a government spends more money than it takes in

What is a Fiscal Deficit?

A fiscal deficit occurs when a government spends more money than it takes in. Government expenditures are usually measured on an annualized basis. A deficit is said to be occurring if, within that one-year period, the government does not take in more revenue than it spends.

 

Fiscal Deficit

 

The simplified formula to determine the fiscal deficit is Total Revenue – Total Expenditure = Fiscal Deficit. It can be a window into government expenses and is often used as a key benchmark to determine an economy’s overall health. It can help give economists, voters, and lenders some insight into the financial state of government and the spending habits of the ruling party.

 

Summary

  • A fiscal deficit occurs when a government spends more money than it takes in.
  • The simplified formula to determine the fiscal deficit is Total Revenue – Total Expenditure = Fiscal Deficit
  • It can be a window into government expenses and the overall health of a nation-state and is often used as a key benchmark to determine an economy’s overall health.

 

Understanding Fiscal Deficits

We briefly discussed how fiscal deficits are calculated earlier in the article. Below, we list off some of the facets of the fiscal deficit and some of the income-generating areas it comprises and offsets with:

 

Government Revenues

1.    Income tax

2.    Sales and provincial/state taxes

3.    Corporate taxes

4.    Duties and customs payments

5.    Investment profits and grants

 

Government Expenses

1.    Healthcare and medical research

2.    Defense

3.    Education

4.    Infrastructure


Fiscal Deficits: When Should You Care?

As students, consumers, managers, and voters, it is important for us to understand why fiscal deficits can either be troublesome or acceptable. If a government is spending more money than they are taking in through taxation or other means, it is important to ask why it is happening.

Perhaps, the country is undergoing a recession, and the deficit is the result of economic stimulus put into place to help bolster the economy. It is often done as the government must incur expenses to address unemployment, institute quantitative easing, and provide loans to struggling businesses during tough economic times.

However, in prosperous times where the economy is healthy and social programs are well-funded, it can be seen as troublesome if the government runs up a fiscal deficit due to mismanagement of funds or poor taxation programs that do not adequately fund the government.

It can become a contentious point in political elections as rivals will often bring up deficits as a sign of poor leadership and weakness. It is important for us as global citizens to understand the fiscal deficit and the role it can play in our economy and in the political sphere.

 

The Expense Component

The expenditure component of the fiscal deficit is a crucial component when understanding deficits. Some components of fiscal debt include government workers’ salaries, infrastructure development, healthcare support, and other government sectors that require funding.

Often, there is contentious debate about budgets and project financing in the U.S. government, as projects will often cause the federal or state government to spend more than they generate, causing long-term fiscal deficits that many argue will weaken the economy over the long term.

It is always balanced out with the need for investment to ensure long term returns and grow a robust economy using short-term deficits. There always exists a back and forth when politicians debate the efficacy of using large amounts of short-term debt to create economic growth, with strong opinions existing on both sides of the argument.

 

Learn More

CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • How The Government Makes Money
  • Quantitative Tightening
  • Recession
  • Short-Term Debt

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!