A budget deficit happens when an organizations spends more money than it earns.
When a government has a deficit and this accumulates over the years, the government is considered to be in debt. In order to finance these debts, governments can either borrow money or monetize their debts.
However, printing more currency to pay for one’s debts can lead to serious economic consequences, as this may quickly lead to inflation. Another method governments can use is the sale of government bonds and short-term bills. The government may also sell some of its assets to ensure that their revenues are sufficient to meet costs of expenditures and debt interest.
To understand a government’s deficit, it is helpful to understand the difference between structural and cyclical deficits, as well. Structural deficit is a term used to describe the condition of deficit which persists throughout the entire business cycle. This is brought about by a high level of government spending which renders collected taxes insufficient.
On the other hand, the cyclical deficit is that which is present during the lowest point of a business cycle. Ideally, the deficit should be made up for at the highest point of the cycle, which is characterized by low unemployment rates and more tax collections. However, this business cycle may be quite difficult to determine, and there are cases in which there is not much of a difference between the high and low points, which may render paying too much attention to the cyclical deficit useless for analysis.
