Deficit Spending - Government Deficits

Government Deficits

When the outlay of a government (its purchases of goods and services, plus its transfers (grants) to individuals and corporations, in addition to its net interest payments) exceed its tax revenues, the government budget is said to be in deficit; government spending in excess of tax receipts is known as deficit spending. Governments usually issue Government bonds to match their deficits. They can be bought by its Central Bank through Quantitative easing. Otherwise the debt issuance can increase the level of (i) public debt, (ii) private sector net worth, (iii) debt service (interest payments) and (iv) interest rates (See: "crowding out" below). Deficit spending may, however, be consistent with public debt remaining stable as a proportion of GDP, depending on the level of GDP growth.

The opposite of a budget deficit is a budget surplus; in this case, tax revenues exceed government purchases and transfer payments.

For the public sector to be in deficit implies that the private sector (domestic and foreign) is in surplus. An increase in public indebtedness must necessarily therefore correspond to an equal decrease in private sector net indebtedness. In other words, deficit spending permits the private sector to accumulate net worth.

On average, through the economic cycle, most governments have traditionally tended to run budget deficits, as can be seen from the large debt balances accumulated by governments across the world.