Government Deficits and the National Debt

Concepts'

  • Debt: Total amount owed or an accumulation of deficits minus surpluses

  • Deficit = Spending > Income

  • Surplus = Income > Spending

  • Budget: a plan of a government’s receipts and expenses needed to effectively and efficiently function

  • Government budget balance: Difference between tax revenue and government spending, Government receipts, revenue, and income is mostly earned through taxes

Types of budget

  • Balanced budget

  • Deficit budget: A situation where government expenditures exceed tax revenues, leading to an increase in national debt.

  • Surplus budget: A scenario where tax revenues exceed government spending, allowing for debt repayment and savings for future expenses.

Factors of Influence for budget balance

  • Fiscal policy: Expansionary fiscal policy leads to deficits because taxes go down and government spending increases, and vice-versa

  • To pay for the government deficit spending and the interest on that debt, there is an increased demand for dollars.

  • Loanable Funds Market

  • The effect of deficit spending shifts the demand for loanable funds to the right

  • Real interest rates increase and demand increases