Government budget balance

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"Budget deficit" redirects here; not to be confused with Government debt.

A government budget is a government document presenting the government's proposed revenues and spending for a financial year. The government budget balance, also alternatively referred to as general government balance,[1] public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a government budget surplus, and a negative balance is a government budget deficit. A budget is prepared for each level of government (from national to local) and takes into account public social security obligations.

The government budget balance is further differentiated by closely related terms such as primary balance and structural balance (also known as cyclically-adjusted balance) of the general government. The primary budget balance equals the government budget balance before interest payments. The structural budget balances attempts to adjust for the impacts of the real GDP changes in the national economy.

Primary deficit, total deficit, and debt[edit]

The meaning of "deficit" differs from that of "debt", which is an accumulation of yearly deficits. Deficits occur when a government's expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures.[2]


Therefore, if t is a timeframe, G_t is government spending and T_t is tax revenue for the respective timeframe, then the primary deficit is

 G_t - T_t \,


 r D_{t-1} + G_t - T_t \,

Finally, this year's debt can be calculated from last year's debt and this year's total deficit, as follows:

 {D_t} = (1+r)D_{t-1} + G_t - T_t \,



Structural deficits, cyclical deficits, and the fiscal gap[edit]

French government borrowing (budget deficits) as a percentage of GNP, 1960–2009.

A government deficit can be thought of as consisting of two elements, structural and cyclical. At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g., on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The additional borrowing required at the low point of the cycle is the cyclical deficit. By definition, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of the cycle.




It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many developed countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone.[citation needed]

National government budgets[edit]

Data are for 2010:[5]

National Government Budgets for 2010 (in billions of US$)
Nation GDP Revenue Expenditure Budget Balance[6] Exp/GDP Balance/Revenue Balance/GDP[6]
US (federal) 14,526 2,162 3,456 -1,293 23.79% -59.8% -8.90%
US (state) 14,526 900 850 +32 7.6% +5.6% +0.4%
Japan 4,600 1,400 1,748 +195 38.00% -24.9% +3.56%
Germany 2,700 1,200 1,300 +199  48.15% -8.3% +6.08%
United Kingdom 2,100 835 897 -75 42.71% -7.4% -3.31%
France 2,000 1,005 1,080 -44 54.00% -7.5% -1.74%
Italy 1,600 768 820 -72 51.25% -6.8% -3.52%
China 1,600 318 349 +305  21.81% -9.7% +5.14%
Spain 1,000 384 386 -64 38.60% -0.5% -4.60%
Canada 900 150 144 -49 16.00% +4.0% -3.13%
South Korea 600 150 155 +29 25.83% -3.3% +2.89%

Early deficits[edit]

United States deficit or surplus percentage 1901 to 2006.




Deficit spending[edit]


Ricardian equivalence[edit]

The Ricardian equivalence hypothesis, named after the English political economist and Member of Parliament David Ricardo, states that because households anticipate that current public deficit will be paid through future taxes, those households will accumulate savings now to offset those future taxes. If households acted in this way, a government would not be able to use tax cuts to stimulate the economy. The Ricardian equivalence result requires several assumptions. These include households acting as if they were infinite-lived dynasties as well as assumptions of no uncertainty and no liquidity constraints.

Also, for Ricardian equivalence to apply, the deficit spending would have to be permanent. In contrast, a one-time stimulus through deficit spending would suggest a lesser tax burden annually than the one-time deficit expenditure. Thus temporary deficit spending is still expansionary. Empirical evidence on Ricardian equivalence effects has been mixed.

Crowding-out hypothesis[edit]

The crowding-out hypothesis is the assumption that when a government experiences a deficit, the choice to borrow to offset that deficit draws on the pool of resources available for investment and private investment gets crowded out. This crowding-out effect is induced by changes in the interest rate. When the government wishes to borrow, their demand for credit increases and the interest rate, or price of credit, increases. This increase in the interest rate makes private investment more expensive as well and less of it is used.[7]

Potential policy solutions for unintended deficits[edit]

Increase taxes or reduce government spending[edit]

The government surplus/deficit of struggling European countries according to European sovereign debt crisis: Italy, Cyprus, Portugal, Spain, Greece, United Kingdom and Ireland against the Eurozone and the United States (2000–2013).

If a reduction in a structural deficit is desired, either revenue must increase, spending must decrease, or both. Taxes may be increased for everyone/every entity across the board or lawmakers may decide to assign that tax burden to specific groups of people (higher-income individuals, businesses, etc.) Lawmakers may also decide to cut government spending.

Like with taxes, they could decide to cut the budgets of every government agency/entity by the same percentage or they may decide to give a greater budget cut to specific agencies. Many, if not all, of these decisions made by lawmakers are based on political ideology, popularity with their electorate, or popularity with their donors.

Changes in tax code[edit]

Similar to increasing taxes, changes can be made to the tax code that increases tax revenue. Closing tax loopholes and allowing fewer deductions are different from the act of increasing taxes but essentially have the same effect.

Reduce debt service liability[edit]

Every year, the government must pay debt service payments on their overall public debt. These payments include principal and interest payments. Occasionally, the government has the opportunity to refinance some of their public debt to afford them lower debt service payments. Doing this would allow the government to cut expenditures without cutting government spending.[8]

See also[edit]



  1. ^ "IMF database". 2006-09-14. Retrieved 2013-02-01. 
  2. ^ a b Michael Burda and Charles Wyplosz (1995), European Macroeconomics, 2nd ed., Ch. 3.5.1, p. 56. Oxford University Press, ISBN 0-19-877468-0.
  4. ^ AARP article on the fiscal gap
  5. ^ Data on the United States' federal debt can be found at U.S. Treasury website. Data on U.S. state government finances can be found at the National Association of State Budget Officers website. Data for most advanced countries can be obtained from the Organization for Economic Cooperation and Development (OECD) website. Data for most other countries can be found at the International Monetary Fund (IMF) website.
  6. ^ a b In this column, a negative number represents a deficit, and a positive number represents a surplus.
  7. ^ Harvey S. Rosen (2005), Public Finance, 7th Ed., Ch. 18 p. 464. McGraw-Hill Irwin, ISBN 0-07-287648-4
  8. ^ Steven A. Finkler (2005), Financial Management For Public, Health And Not-For-Profit Organizations, 2nd Ed., Ch. 11, pp. 442–43. Pearson Education, Inc, ISBN 0-13-147198-8.

External links[edit]

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