INTRODUCTION
Government budgets are made of 3 types which are; balanced budget, budget surplus and
budget deficit but our made concern here is budget deficit.
❖DEFINITION
What Is a Budget Deficit?
A budget deficit occurs when expenses exceed revenue and indicate the financial health
of a country. The government generally uses the term budget deficit when referring to
spending rather than businesses or individuals. Accrued deficits form national debt.
A budget deficit occurs when a business spends more than its annual income. Deficits can
sometimes occur intentionally either as a response to a foreseeable circumstance that will
temporarily decrease income or in favor of a long-term beneficial opportunity.
Unfortunately, a budget deficit is often unplanned. Either way, a deficit must be paid, and
if the cash is unavailable, it is paid through borrowing.
❖ ADVANTAGES
• Increase in standard of living.
• Increase in infrastructural development.
• Reduce unemployment.
• Increase the country’s GDP.
• Encourages investors.
, ❖DISADVANTAGES
➢ Crowding Out Effect
A budget deficit can cause the government to increase its reliance on borrowing from
foreign sources. As this happens, future budgets can place more emphasis on loan
repayments and less emphasis on savings and investment. This chain reaction, called the
crowding out effect, can eventually lead to a situation where the federal government
allocates less money to investments, such as public education and the highway system,
placing more of a burden on state, county and local governments.
➢ Future Debt Burden
An often-cited reason for reducing the budget deficit is the burden it places on future
generations. Since deficits tend to increase borrowing, which accrues interest over time,
the current generation tends to reap the benefits of the borrowing and a future generation
gets the bill. If the attitude of temporarily covering financial problems and leaving the
next generation with the damage were to continue over several generations, the nation
could find itself in a situation where it could not possibly climb out of its debt.
Creating additional debt increases the deficit over the years, fueling a deficit growth cycle
that can get out of hand. Interest on the debt increases the business’s spending. Higher
debt complicates finding the funds to pay. It worries creditors who may increase interest
rates for further borrowing, which grows the deficit even higher if revenue does not
increase.
A budget deficit fiscal policy cuts into a business’s cash reserves, lowering its equity and
making it unappealing to investors and loan officers. When a company is on budget,
projections have been met and the managers have responsibly handled the money. A
company with consistent or multiple deficits can indicate possible mismanagement,
shaking investors’ and banks’ trust that they will see a return.
Government budgets are made of 3 types which are; balanced budget, budget surplus and
budget deficit but our made concern here is budget deficit.
❖DEFINITION
What Is a Budget Deficit?
A budget deficit occurs when expenses exceed revenue and indicate the financial health
of a country. The government generally uses the term budget deficit when referring to
spending rather than businesses or individuals. Accrued deficits form national debt.
A budget deficit occurs when a business spends more than its annual income. Deficits can
sometimes occur intentionally either as a response to a foreseeable circumstance that will
temporarily decrease income or in favor of a long-term beneficial opportunity.
Unfortunately, a budget deficit is often unplanned. Either way, a deficit must be paid, and
if the cash is unavailable, it is paid through borrowing.
❖ ADVANTAGES
• Increase in standard of living.
• Increase in infrastructural development.
• Reduce unemployment.
• Increase the country’s GDP.
• Encourages investors.
, ❖DISADVANTAGES
➢ Crowding Out Effect
A budget deficit can cause the government to increase its reliance on borrowing from
foreign sources. As this happens, future budgets can place more emphasis on loan
repayments and less emphasis on savings and investment. This chain reaction, called the
crowding out effect, can eventually lead to a situation where the federal government
allocates less money to investments, such as public education and the highway system,
placing more of a burden on state, county and local governments.
➢ Future Debt Burden
An often-cited reason for reducing the budget deficit is the burden it places on future
generations. Since deficits tend to increase borrowing, which accrues interest over time,
the current generation tends to reap the benefits of the borrowing and a future generation
gets the bill. If the attitude of temporarily covering financial problems and leaving the
next generation with the damage were to continue over several generations, the nation
could find itself in a situation where it could not possibly climb out of its debt.
Creating additional debt increases the deficit over the years, fueling a deficit growth cycle
that can get out of hand. Interest on the debt increases the business’s spending. Higher
debt complicates finding the funds to pay. It worries creditors who may increase interest
rates for further borrowing, which grows the deficit even higher if revenue does not
increase.
A budget deficit fiscal policy cuts into a business’s cash reserves, lowering its equity and
making it unappealing to investors and loan officers. When a company is on budget,
projections have been met and the managers have responsibly handled the money. A
company with consistent or multiple deficits can indicate possible mismanagement,
shaking investors’ and banks’ trust that they will see a return.
