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What is a Budget Deficit?
Analyzing a budget normally involves assessing two factors. One is the amount that needs to be paid. The other is the income that is received and used to make payments. A budget deficit occurs when more money needs to be paid out than what is available or received.
Budget deficits, which are common with governments, can also occur with personal and business budgets. When there is a budget deficit, there are insufficient funds. If this situation is prolonged, the result is generally debt.
Understanding how a budget deficit can occur is a matter of basic accounting. A person simply needs to add up all sources of income. In a personal budget, this could include salary, alimony, and child support. All of the expenses should be added up, such as mortgage, food, and utilities. If the total of the expenses for a given period, such as a month, is more than the income, that person will experience a budget deficit.
It may seem that a budget deficit creates an impossible situation because there are demands but there are no resources to fulfill them. There are several reasons that a budget deficit does not always lead to absolute catastrophe. One reason is because a budget generally covers a certain time period. Although funds may not be available during that time, they may become available at a later date.
For example, a company may have a budget deficit for the first quarter. This means for the months of January through March, the company does not have sufficient income to fully pay all that is required. That company, however, may be able to make partial payments until May when sufficient funds are acquired.
Another reason that a budget deficit may not result in catastrophe is because a budget is generally planned in advance. This means that insufficient funds are often predicted based on known factors. A business, for example, may know that they need $45,000 US Dollars (USD) to cover their expenses but may only forecast earning $30,000 USD. It is possible, however, that earnings could exceed the forecast.
When budget deficits actually occur, they are often handled with credit. The types of credit that are available depend on the entities concerned. For example, governments may sell bonds or borrow from other countries.
Businesses may acquire bank loans. Individuals often rely on credit cards and personal loans. Credit, however, often increases the debt caused by deficits: not only does the amount borrowed need to be repaid, but interest is added in most cases.
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![A budget deficit occurs when income is less than spending.]()
By: Picture-FactoryA budget deficit occurs when income is less than spending. -
![A budget is considered balanced there is more cash coming in than going out.]()
By: Andy DeanA budget is considered balanced there is more cash coming in than going out.
Discussion Comments
@Charred - I think people are better at handling their money than politicians are. The reason is simple. We can’t raise taxes. We can certainly borrow, but most people are smart enough not to do that. It’s commonly understood that you should reduce credit card debt, for example. I think most people do try to do that, although we all fail from time to time.
@David09 - It’s not uncommon for businesses to operate at a deficit level, especially during the early years.
They finance the deficit with loans or existing cash on hand. I worked in the telecommunications industry for ten years and for most of that time the company was rolling in a river of red ink.
Each month they were burning through their existing cash on hand. There comes a point where you must pay the piper however, and eventually they filed for bankruptcy and were later acquired by another company. Governments don’t usually file for bankruptcy however; Greece is one exception.
@allenJo - I think the Chinese would be well justified to call their loans frankly. Our debt is simply unsustainable and they know that. The 2010 federal budget deficit was well over one trillion dollars.
Do politicians think that we can keep borrowing with no end in sight? What’s worse is that the budget deficit will eat a bigger piece of the gross domestic product of the country, further eroding the wealth of the businesses and the nation’s citizenry.
I do hope we can avoid financial catastrophe however. At least people are beginning to talk about the problem.
The federal deficit has gone largely ignored by politicians in my opinion for too long. Do you know why that is?
It’s because there are no real consequences to the federal deficit, not in a way that our policy makers really feel and understand. They can always sell more bonds to cover their deficit and they can also raise taxes.
Right now China owns a lot of our debt. What would happen however if the Chinese decided to call their loans, even only a fractional percentage of them? The United States would head towards a day of reckoning.
Either we would be forced to get our fiscal house in order or taxes would go through the roof, or many of the entitlement programs subsidized by these deficits would simply go unfunded.
Unfortunately, I believe that day of reckoning is just around the corner. The Chinese have already slightly limited their holdings in U.S. debt. The reduction is slight, but I think they’re giving us a hint.
I think it would be very interesting to see the national deficit by year, and how much it has continued to climb and not get any better.
I know this is a hot topic and heavy on the mind of everyone. When the federal government has such a huge budget deficit, this trickles down to just about every business and person.
My husband has worked for the city for about 10 years. We used to think this was a stable and secure job that he would have until he was ready to retire.
Now they are saying they are going to have to make some more cuts in order to meet their budget. My husband has already made it through some other major budget cuts. Every time they say this, we hold our breath and hope he won't lose his job.
When I lost my job, it took me much longer than I thought to find a new job. When I finally found a job, the pay was not as much as I was used to getting.
Because of these circumstances, all of the money I had in savings was used up. This created a personal budget deficit than I had never dealt with before.
I had to rely on credit cards just to make ends meet. Even though I was thankful to have a way to pay my bills, I knew this was just putting me further in debt.
Thank goodness for a tax return that helped me get back on track. Even though you have a perfectly planned budget, you never know exactly what is going to happen to can cause a budget deficit.
My daughter is a teacher at a high school and they have to keep making cuts in the school system because of their budget deficit.
Fortunately she was hired right out of college, even when many teachers were already losing their jobs. She doesn't know how much job security she has though, because she is an art teacher.
It seems like some of the first programs they want to cut when they have a budget deficit are the art and music programs.
I attended the last school board meeting where they were voting on some of these issues, and I was amazed at the dollar amount that needed to be cut from our school system.
This was a very heated meeting and lasted a long time. I got there at 6:30 pm and when I left at 11:00 pm, the meeting was still going on.
Some hard decisions were voted on, but they still have a long way to go.
When I hear how much the current federal budget deficit is, I can hardly fathom how much money that is.
My first question is how the government can get so far in debt. Whenever I have a personal budget deficit, I know I need to change things in a hurry so I don't continue to go further in debt.
Not only is the total amount of debt overwhelming, but where to start cutting out programs is also a big issue.
Many people have come to rely on those federal programs - whether justified or not, and abruptly cutting them out causes some major upheaval for a lot of people.
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