Fiscal DeficitWhen a government spends beyond its means

A government’s main source of generating revenue is through its tax collection.

There are also other forms of income that a government can generate such as licensing fees, permits, tariffs, customs duties, etc.

The government will then use the revenue it collected for the betterment of its country and its citizens.

For example, the government can use its collected revenue to finance investments in infrastructure development.

Or it can use its collected revenue to create jobs, which in turn lowers the unemployment rate of the country.

However, in the pursuit of developing its country, it might spend more than the amount it has collected.

This creates a “fiscal deficit” situation for the government that is spending beyond its means.

But what does it mean for a government to have a fiscal deficit? Is it a negative thing?

Does it mean that the government is doing something fundamentally wrong?

In this article, we will be exploring what a fiscal deficit is.

What does it mean for a government to have a fiscal deficit?

Does a fiscal deficit always paint a bad picture for the government that has it?

We will try to answer these questions as we go along with the article.

What is a Fiscal Deficit?

A fiscal deficit refers to a situation where a government’s spending is higher than the revenue it collected.

It occurs when a government spends more money than the revenue it collected in a given year.

If we compare it to a regular business, it is when the business incurs a net loss.

A net loss occurs when a business’s expenses are higher than its revenue.

A fiscal deficit can be calculated as a percentage of the country’s gross domestic product (GDP) or in absolute terms.

This means that in the US, a deficit may mean the total dollar amount that the government spent in excess of its income.

The term “income” only includes taxes and other forms of government revenue (e.g. license fees, tariffs, permits).

It should not include borrowings that the government used to make up the shortfall.

Fiscal deficit is one of the benchmarks that analysts use to assess an economy’s overall health.

It can also give insight to voters, economists, and lenders about a government’s financial state, as well as the spending habits of the ruling party.

Do note that a fiscal deficit is not the same as fiscal debt.

The term “fiscal deficit” refers to the excess spending of a government in a particular year.

On the other hand, fiscal debt refers to the total debt that a government accumulated over several years of deficit spending.

Calculating Fiscal Deficit

We can calculate a government’s fiscal deficit as a percentage of the gross domestic product (GDP) or as the money amount (excess spending).

The simple formula for calculating fiscal deficit in terms of money amount is as follows:

Fiscal Deficit = Total Revenues – Total Expenditures

Total (government) revenues include collections on the following:

• Income taxes
• Corporate taxes
• Sales and provincial/state taxes
• Tariffs and customs duties
• Investment profits and grants
• Other government collections

Total (government) expenditures include but are not limited to the following spending:

• Healthcare and medical research
• Education
• Infrastructure
• Defense
• Social services
• General public services
• Economic services
• Welfare benefits

Understanding a Fiscal Deficit

While the term “deficit” may mean something negative, a fiscal deficit isn’t automatically a negative event.

In fact, it’s a common occurrence in countries across the world.

The opposite, which is a surplus, is a more rare occurrence than a fiscal deficit.

In the US, fiscal deficits are a common occurrence ever since the nation claimed independence. Consecutive years of fiscal deficits may mean that a country is speeding up its development.

Some even argue that deficit spending may help countries climb out of economic recession.

Still, it’s important to question why a fiscal deficit is happening.

Why is a government spending more than what it’s taking in?

Is it to accelerate the development of the nation? Or could it be to address an economic recession?

There must be a good reason as to why the government is having a fiscal deficit.

After all, a fiscal deficit can occur through mismanagement of funds or the implementation of poor tax policies.

In such cases, it could lead to the degradation of the nation’s overall economic well-being.

It’s easier to justify a fiscal deficit if the country is undergoing a recession.

The country will need to provide economic stimuli that will help bolster the economy.

This might mean spending more to address unemployment, provide loans to businesses (that often have low rates), and/or institute quantitative easing.

However, in times when the economy is booming, a fiscal deficit may be harder to justify.

Still, if there’s a good reason for a fiscal deficit, there’s not much to worry about.

Balancing Out a Fiscal Deficit

A government will have to finance all of its deficits.

Not doing so will result in them growing to the point where they become unmanageable.

It can be challenging to address a rising deficit, but a government has tools that it can use.

A government may issue bonds (e.g. Treasury bonds or T-bonds) to raise money.

Private individuals or businesses will then buy these bonds.

Banks may buy them and then eventually sell them to investors.

Other governments may even buy another government’s bonds.

What makes government bonds an enticing investment is that they are basically risk-free.

Holders of government bonds are certain that they will get paid interest and principal.