What is a Budget Deficit

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.

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Problems of Budget Deficits

Problems of Budget Deficits

A budget deficit occurs when Government spending is greater than tax revenues. For political reasons a budget deficit often occurs. Politicians never gain votes by raising taxes and cutting spending. With many major World economies facing a large budget deficit. It is worth considering the main economic disadvantages of Government borrowing.

Increased Borrowing

The govt will have to borrow from the private sector, in the UK the government does this by asking the Bank of England to sell bonds and gilts to the private sector.

Higher debt interest payments

Selling bonds will increase the national debt, this is currently £300 billion. The annual interest payments is approximately £23 billion, this has a high opportunity cost because it requires future generations to pay higher taxes.

Increased AD

A budget deficit implies lower taxes and increased G, this will increase AD and this may cause higher Real GDP and inflation.

Higher Taxes and lower spending

In the future the govt may have to increase taxes or cut spending in order to reduce the deficit. This may cause reduced incentives to work

Increased Interest rates

If the govt sells more bonds this is likely to cause interest rates to increase. This is because they will need to increase interest rates in order to attract investors to buy the extra debt.
If govt interest rates increase this will push up other interest rates as well.

Crowding Out

Increased govt borrowing may cause a decrease in the size of the private sector (see fiscal policy)

Inflation

In extreme circumstances the govt may increase the money supply to pay the debt, however this is unlikely to occur in the UK

If the govt sells short term gilts to the banking sector then there wil be an increase in the money supply, this is because banks see gilts as near money therefore they can maintain there lending to customers. However they will also be increasing the money supply by lending to the govt.

note the effect of a budget deficit depends to some extent on the cause. For example in a recession a budget deficit may be necessary to get the economy out of recession. If the government is borrowing to invest in infrastructure and education this can benefit the economy in the long term.

Managing a Budget Deficit

Managing a Budget Deficit

If your expenses are greater than your income then you have to contend with a budget deficit and there are only two ways you can deal with this. You can earn more money or you can spend less – it is as simple as that. Unfortunately it is easier said than done some of the time and that’s why many people get into debt in the first place by topping up the deficit with money from credit cards and other high interest loans.

Your budget will help you to focus on areas where you can cut your spending. Obviously you will be looking at luxury items first and those non-essential items that will be easy to eliminate. If you can eliminate your budget deficit by getting rid of these non-essential items then you are in luck however it might not be quite that easy for you to reduce your spending enough to make up the deficit.

If that is the case then you will have to go back over your budget again and see the areas where you can cut your spending to try to close the gap between income and expenditure.

If you are putting a percentage of your income aside a regular basis for some type of saving scheme then you might need to consider canceling that saving until you have managed to reduce your debt to such an extent that you are able to cover your costs with your income.

Once all areas of cost-cutting have been exhausted you are left with the only other alternative of increasing your income and you will need to look at whether you’re able to increase your hours of work or possibly even get a second job to bring in enough additional income to cover your expenses.

One way or another unless this budget deficit is eliminated you will be destined to continue accumulating debt and the more you do that the more difficult it will be to bridge the gap.

How to Tackle Your Budget Deficit

How to Tackle Your Budget Deficit

The first thing you need to do is create a list of income and expenses. I will from now on refer to this list as the worksheet.

If the bottom-line number on the worksheet is negative, you need to deal with the budget shortfall by cutting your expenses. Review your budget, looking for costs you can eliminate or cut back. Focus first on your discretionary expenses because those are nonessential items. You will find most of your discretionary expenses items in the “Variable expenses” category on your worksheet; even so, some of your periodic and fixed spending items can also be discretionary. Your cable subscription is not an essential expense and you may be able to choose a less expensive Internet service provider than the one you have now (or go to a library when you need to use the Internet), and perhaps you can cancel a couple of other memberships.

If your deficit is relatively small and mostly due to waste and fluff; you can move the budget into the black simply by eliminating nonessentials, but sometimes it may not be that easy. Instead, you may have to endure several rounds of budget cutting while doing some serious belt-tightening before the total monthly expenses is less than the total monthly income. You can use your worksheet to estimate the impact of each round of budget cut on your budget’s bottom line number.

If you’re still contributing to a retirement plan and/or savings, stop doing it for now. Use your money to cover your living costs and pay down all high interest debts. Why? Using retirement accounts and savings only earn very few percentage of interest every month – most likely far below the rates on your high-interest debts. For this reason, each month you may pay more in debt interest than you can get in saving interest. When your financial situation gets better, you can start contributing to retirement again and savings again. For now, you should put every cent you have, toward reducing your living costs and toward paying down all high interest debts.

Public Private Partnerships Solving Government Budget Deficits

Public Private Partnerships Solving Government Budget Deficits

As government budget deficits continue to climb for state, local and federal governments, you will hear much more about the utilization of Public Private Partnerships, also known as, “P3s” or “PPP” to solve this problem. P3 projects are quickly rising in popularity due to the success of obtaining funds to renew Government infrastructure, improve transportation, and construct new projects that they could not afford before.

Public Private Partnership projects involve a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPPs, the cost of using the provided services is given exclusively by the users of the service and not by the more traditional method of using the taxpayer.

But why would a private company assume such a huge risk?

Like any investment with large risk, there is a great opportunity for an invested private business to make a lot of money. With Public Private Partnerships, revenues can be in the form of either a fee for service, paid by government, or fees collected from users, as in the case of highway tolls, automatically ticketed red lights, or hotels attached to convention centers.

One example of a successful development utilizing Public Private Partnerships is the Overton Hotel and Convention Center located in Lubbock, TX. This 303-room hotel with a 47,000 gross square-foot conference center is located across the street from Texas Tech University and Jones AT&T Stadium in Overton Park
and was financed with private debt and equity. The conference center was financed with City bonds to be repaid by site-specific occupancy taxes and property taxes. The capital plan also included naming rights, room licenses and nonprofit foundation grants.

The City now leases the conference center on a long-term basis to the hotel owner who operates the entire property. In addition, the hotel also partnered with Texas Tech University’s Restaurant, Hotel, and Institutional Management (RHIM) program to provide hands-on laboratory experiences in a variety of areas that will truly benefit the RHIM students, giving them the opportunity to become successful professionals in the hospitality industry.