Fiscal Deficit Explanations

Before defining the term fiscal deficit, it is necessary to refer to each of the concepts that comprise it separately, in order to understand its complexity.

The term deficit refers to a lack of something. In the economic aspect, it is related to the poor use of resources in a State. That is to say that a nation is in deficit when the money that has been used in the transactions is superior to that which has been received, that is to say, to the income.

For its part, the word tax refers to that related to the State, its treasury (treasury).

The union of both terms allows access to a notion of what the treasury owes ; that is, it appears when there is a mismanagement of public money, which results in economic complications for the entire country.

  • Abbreviationfinder: Find definitions of English word – Military. Commonly used abbreviations related to word are also included.

The fiscal deficit is the negative difference between public revenues and expenditures in a given period of time. The concept encompasses the consolidated public sector as well as the non-financial public sector and the central government. This is the negative result of the state accounts. When government spending exceeds revenue, a deficit occurs.

The fiscal deficit, therefore, appears when the income collected through taxes and other means is not enough to cover those payment obligations that have been committed in the budget. National accounting is responsible for measuring the deficit, appealing to various accounts to be able to represent economic activity with numbers in a systematic way.

It is important to note that when a country spends more than it earns, it is said to have a fiscal deficit, if it spends the same as it earns, a balanced budget, and if it spends less than what goes into its coffers, it has a surplus.

When a country is in a growth stage, it is normal for it to present a budget surplus since society will duly pay its taxes and will consume more goods and services, since it will have a job that will allow it. For their part, the companies will have a higher level of profits, which will bring as a positive consequence, a greater income from fiscal money.

To be clearer: if a State has a public debt of 3,000 euros at the end of 2009, and the following year shows a deficit of 200 euros; its public debt at the end of this last year will be 3,200 euros and any interest that may be added. In other words, the public debt implies all those annual deficits that the State has not been able to repay and that have been generated in the attempt to settle old state debts.

Fiscal deficit and public debt

On the other hand, it is necessary to define the term fiscal deficit and public debt, since it is often believed that they are the same thing and, clearly, they are not.

The fiscal deficit, as we have already said, refers to the State’s losses over a year; while the second term refers to the debt that the State has assumed against its creditors in various periods, that is, the deficit that it has accumulated. When there is a deficit, the State must resort to public debt to pay the negative difference of its economic actions, in this way, both concepts feed off each other.

When a fiscal deficit appears, it is understood that the State has been spending during a certain period of time, generally one year, more than what it has received in taxes and other transactions for public money.

It should be noted that the way in which a State obtains money is through the collection of taxes, the profits from selling natural resources and the loans it makes to other countries. The money you receive must be used for operating expenses (employee salaries), social investment and infrastructure (rent, maintenance), debt payments (what other countries have lent you), and national security, among others. other state spending.

The deficit implies that the State has used more money than it had in its coffers, and that negative balance must be paid in some way; For this, a series of tools are used that allow a greater collection or a lower expense (decrease in salaries, elimination of unnecessary expenses). But it is not so easy to make these decisions, it is necessary to take into account a lot of variables because any decision can affect the political and social aspects of the country.

According to the economic policy described as Keynesian (by John Maynard Keynes ), the budget deficit is a valid tool to promote economic activity when private investment has been reduced and consumer spending is depressed. This theory, however, has been disproved in various passages of history, since they produce certain negative effects that prevent the expansion of the economy, such as inflation.

Specialists cite, for example, that the increase in demand can increase the amount of imports and not local production, and warn that if the deficit is financed from the issuance of banknotes, it usually leads to inflation and ends up attacking even more consumption.

To measure the fiscal deficit, national accounting applies various criteria regarding payments, collections and obligations. In general, the deficit is qualified or judged according to the percentage of the Gross Domestic Product (GDP) that it represents.

It is important to mention that both the public debt and the fiscal deficit are the worst enemies of development, the reasons why those underdeveloped countries cannot get out of this economic situation and continue to borrow.

These two concepts are closely linked. The debt appears when there is a certain fiscal deficit, when the country’s expenses are higher than its own income, which is very rare that does not happen. Because States always spend more than they earn and that is why they always resort to public debt, in order to be able to pay what they otherwise could not.

The relationship that exists between fiscal deficit and public debt is irrefutable, since together they form a vicious and permanent circle that is reflected in the use of public debt to cover the expenses of the previous year. As a consequence, the deficit increases and each year it becomes more difficult to cover the debt.

Ideally, the public debt would be invested in a way in which it could be recovered, but unfortunately what usually happens is that this money is spent on bureaucracy and to keep a certain group in power.