Economics 101: What is a budget deficit?

Julie Brownlee, Fsp Invest, 29 Jul. 2015

Tags: budget deficit, what is a budget deficit, economy, economics, south african economy,

In this year’s budget, the government revealed that South Africa’s budget deficit would likely widen thanks to the poor state of the economy.

To deal with this growing shortfall, amongst other measures, the government hiked some personal tax rates.

So what exactly is a budget deficit?

Read on to find out…

What is a budget deficit?

The income a government receives varies over time. For the majority of governments, a major source of revenue is tax.

The income received from taxes tends to move up and down with the economy. For instance, when the economy isn’t performing well, tax revenue will drop. When the economy is booming, tax revenue will rise.

In order for a government to keep its spending at a consistent level over the long run, it sometimes has to run a budget deficit. This means the government spends more than it receives in income.

Governments pay for this deficit by borrowing money by way of selling bonds.

Different types of budget deficits

Cyclical deficit
If a budget deficit is the result of temporary changes to the government’s income, this is a cyclical deficit.

This is because the surpluses at other times in the economic cycle should offset the deficit.

Structural deficit
If a country is always running a budget deficit taking into account boom times, this is a structural deficit. Simply put, the government is always spending more than it earns in income.

The size of this type of deficit can reveal how good a government is at managing its finances. But working out the actual structural budget can be difficult.

South Africa’s budget deficit

With South Africa’s budget deficit widening, the government is trying to rein in spending and increasing tax revenues is one way to boost its income.

As the South African economy continues to struggle, it makes the job of dealing with a budget deficit harder.

So there you have it. What a budget deficit is.

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