What is Budget Deficit?

Budget Deficit Formula

Budget Deficit = Total Expenditures by the Government − Total Income of the government

  • The government’s total income includes corporate taxes, personal taxes, stamp duties, etc.The total expenditure includes defense, energy, science, healthcare, social security, etc.

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Budget Deficit Calculations

Recently, the U.S. budget deficit climbed to $779bn, its highest since 2012. Let us calculate the budget deficit of the United States.

Total Income Breakup (US):

  • Individual Income Tax = $1,684 billionSocial Security and Other payroll taxesPayroll TaxesPayroll taxes are statutory deductions made by the employer from an employee’s regular salary and wages, and usually, such withholdings mostly have both employer and employee equal contributions. These taxes are collected by tax authorities from respective employers and paid for human welfare schemes, infrastructure development.read more = $1,171 billionCorporate Income Taxes = $205 billionOther Taxes and Duties = $270 billion

Total Income (U.S.) = $1,684 billion + $1,171 billion + $205 billion + $270 billion = $3,329 billion.

Total Expenditure Breakup (US):

  • Defense = $665 billionSocial Security = $988 billionMedicare = $589 billionInterest on Debt = $325 billionOthers = $1542 billion

Total Expenditure (US) = $665 billion + $988 billion + $589 billion + $325 billion + $1542 billion = $4,108 billion.

  • Budget Deficit = Total Expenditures by the Government − Total Income of the government.US Budget Deficit = $4,108 billion – $3,329 billion = $779 billion.

Causes of Budget Deficit

So, what are the factors that cause the budget deficit? Let us have a glance at them: –

#1 – Slow Economic Growth:

If a country’s economy is not going as fast as the government spends money, it can experience slow economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more (due to inflation and other economic factors). As a result, the government does not collect as much money as planned and deals with the deficit.

#2 – High Government Spending:

If a government has been investing a lot of money into a particular project that would yield huge gains in the future, then it may create a deficit for the government for the current period. That is good if the government has spent the money on the sustainable growth of an investment or an infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more. But it is futile if the expenses do not ensure sustainable development or are incurred to support some unsustainable overheads.

#3 – High Unemployment Rate:

If a country is experiencing a high unemployment rate, maybe the government needs to pay more subsidies for that purpose. Therefore, it should make all efforts to improve the unemployment rate to reduce the number of grants and accelerate economic growth.

#4 – Combinations of the above Factors:

Excessive government spending may not happen due to a particular reason. Instead, the combinations of all the factors may become responsible for the deficit in a country. Therefore, the government should make an effort to keep the expenses ExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more low and create more avenues to gather more revenues.

Is Government Budget Deficit Bad?

Do you think that the government deficit is always bad? No. In reality, the investors and the financial analysts are the two important factors determining whether the government deficit is good for the country.

  • The first factor is why government expenditure is so high. Is it because the government has invested in specific infrastructure or invested the money in an investment that can yield high returns? Financial analysts give a green signal to the government deficit if that is the case. And if not, analysts can mark them as a poor expenditure.The second factor is how the deficit or the national debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more impacts the country. We call it national debt because the government requires borrowing money to pay for some things due to a lack of revenue.The effects of the deficit may be havoc on the country’s economic affairs. However, if the outcome is mild, the debt is not a problem, and vice versa.

How to Reduce Government Budget Deficit?

There are only two ways to reduce the budget deficit- increasing revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more and reducing spending.

However, for the government, it is very tricky.

  • The two significant ways to increase revenue for the government are increasing the tax percentage and ensuring economic growth. However, if the government increases too much tax, it may affect economic growth and not drastically improve it.To reduce expenses, the government needs to reduce expenditure. However, reducing too many costs will affect the economy of the country. Since government spending is a part of the country’s GDPGDPGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.read more, the excess reduction will slow down economic growth.The idea is to understand the current state of affairs and address the government deficit.

Budget Deficit Video

This article has been aGuide to Budget Deficit. Here we discuss its formula along with calculations and practical examples (calculation of U.S. budget deficit). Additionally, we saw the causes of the deficiency and the government’s steps to reduce the same. You can learn more about economics from the following articles: –

  • Autonomous ExpenditureBudget Surplus InterpretationsCurrent Account DeficitBudget AnalystBalance of Trade vs Balance of Payments