Budget Deficit

Budget deficit is the amount by which a government's expenditures such as defense, social security, science, energy and expenditure on infrastructure, etc. exceed its total income which comes principally from taxes, duties, etc.

Budget deficit is an important phenomena in fiscal policy. When an economy is in recession, the government usually runs a budget deficit in order to boost the economy. Budget surplus is a situation opposite to a budget deficit i.e. in a budget surplus, a government's income exceeds its total expenditures. We normally see budget surpluses when economy is suffering from excessive inflation.

Formula

Budget Deficit = Government's Total Expenditures − Government's Total Income

Example

United States Federal Government's total income for the fiscal year 2012 is $2.469 trillion while its corresponding expenditures amount to $3.796 trillion.

This gives us a budget deficit of $1.327 trillion ($3.796 trillion of expenditures minus $2.469 trillion of total income).

US federal government has been running a budget deficit for last few years in order to sustain the economy which has suffered from severe recession in 2007-2009.

Written by Obaidullah Jan