budget deficit

The amount of shortfall that occurs when expenditures exceed revenues. While individuals and private enterprises can have budget deficits, the most economically significant deficit is the federal budget deficit. The deficit must be covered through the sale of government securities on the financial market or through the printing of money. Since printing money would be unacceptably inflationary, the government sells bonds and other financial instruments, promising to repay the face value plus interest in a specified time. The accumulation of obligations constitutes the national debt.

In the US during the Reagan administrations, tax cuts and increased defence spending combined to create massive budget deficits.

Because there is a limited amount of investment capital available, the debt has been sold increasingly to foreigners. Debt service now consumes 15% of the federal budget, and federal borrowing has distorted financial markets, squeezing out private borrowers. Interest on the debt is the fourth-largest component of the budget. Public debt is the total net government debt, including net federal and net state and local government debt.