What is a Budget Deficit?
2016 is the year of the budget deficit, in Europe, the USA and other recession hit Countries around the World. But what actually is a budget deficit?
When we spend more than we earn, we create a debt. Sometimes this debt can be small, as it actually is based on our assets- a house, land, or future earnings. Other times it can actually surpass the value of our assets, and force us into liquidation or voluntary bankruptcy.
This works the same way with Countries. For instance when a nation spends more than it earns, it creates a deficit. This deficit is actually debt, which often is financed through loans from International Banks or by issuing bonds. In worse case scenarios the IMF will jump in and loan to countries with high deficits.
In some cases Countries may have a high deficit but have assets that can be used to borrow on in order to develop. This is often the easiest way to pay for development, especially in resource-rich nations. Economists usually see this as a convenient way to finance development.
Nations with high deficits are comparable to individuals with high debts. They lack funds, because more of what they earn is used to pay off these debts. So they have to cut back, re-mortgage state assets or even sell off their natural resources. So comparable to individuals who have high debts- the spare television might be sold on eBay and living expenses are cutback.
Often we see charts showing a national deficit as a percentage. This percentage is calculated on the GDP (Gross National Product) of a Country, which is perceived to be based on what the nation produces. This sounds quite straightforward, but sometimes the actual GDP is based on the “market value” of what’s produced in a country- which could be as diverse as the food it produces, to the gross value of civil law suit settlements.
If the perceived percentage is positive, then the Country in question is still producing more than it owes. But if the percentage is negative, it is currently producing less than it owes. In 2010 Ireland, the UK, Romania, Greece and Malta have the highest deficits in Europe. In the Americas, the USA has the highest deficit, whilst in Asia, Japan.