Budget Deficit

When a government spends more than it collects, it must borrow to cover the difference, usually by issuing bonds. Each year's deficit adds to the total stock of government debt.

For example, if a government collects 800 billion in revenue and spends 860 billion, its budget deficit is 60 billion. If revenue exceeds spending, the government has a budget surplus, which can be used to repay debt.

Deficits are often expressed as a percentage of GDP, which makes them easier to compare across countries and over time. A deficit of 3% of GDP is common in many developed economies, while deficits can rise much higher during recessions, wars or crises.

Deficits are not always bad. Borrowing during recessions can support the economy, and borrowing to invest in infrastructure or education may pay off over time. However, large and persistent deficits increase government debt and interest costs, and may eventually require higher taxes or spending cuts. Economists often look at the structural deficit, which removes the effects of the business cycle, to judge whether a government's finances are sustainable.