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On Budget Deficit - Term Paper Example

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Class Information Date Budget Deficit Introduction The term deficit simply refers to a situation where liabilities exceed assets, expenditures exceed income, losses exceed profits, or imports exceed exports. Generally, budget deficit occurs at governmental levels and this term could be defined as the amount by which government revenues fall short of government spending…
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Term Paper on Budget Deficit
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On Budget Deficit

Download file to see previous pages... The primary deficit indicates the difference between short term government spending on goods and services and total short term revenues from all types of taxes and transfer payments while primary deficit plus interest payments on debt constitute total deficit. The government budget deficit comprises of two elements such as cyclical and structural. A high unemployment rate is observed at the lowest point of a business cycle; and this situation indicates that tax revenues are low and public welfare expenditures are high. Under such circumstances, governments are forced to borrow additional money from external sources. This deficit, realized at the low point of the business cycle is called cyclical deficit. Theoretically, governments will completely repay their cyclical deficit by the next cyclical surplus realized from the peak of the cycle. In contrast, the structural deficit has been defined as the deficit that remains throughout the business cycle as a result of excess level of general government spending over prevailing tax levels. This paper will identify the causes of and solutions for budget deficit. It will also analyze two countries that have experienced budget deficit over the last few years. Causes of budget deficits Generally, government budget deficits arise mainly as a result of two sets of causes. Firstly, structural factors cause government budget deficit and these factors are determined according to the special characteristics of the economy and its relationship with the external world. Secondly, implementation of thoughtless government policies may lead to sharp rise in expenditures. This situation would also directly lead to budget deficit. In some cases, it has been identified that governments lack essential fiscal discipline to control public sector spending. In contrast, governments may be often forced to increase public expenditures in order to maintain healthy income levels and employment rate when monetary measures indicate that the private sector is falling into recession. According to Morrison, the five major structural factors determining a budget deficit are “level of economic development, growth of government revenues, instability of government revenues, government control over expenditures, and extent of government participation in the economy” (Morrison, 119). The author argues that governments with lower levels of development are highly prone to budget deficit as they are pressurized to spend more on primary sectors like infrastructure and education and this condition may prevent them from effectively controlling their budgets. In addition, developing and underdeveloped governments may face issues like poor private saving and low tax revenues; this situation would probably persuade governments to raise their public sector spending rates to meet public expectations. Similarly, when a government experiences slow growth in revenues, it needs to treat its budget with deficit financing. Instability of government revenues indicates that the government may face difficulties associated with tax revenue fluctuations due to instable flow of income. To illustrate, export taxes will be the major source of revenue for petroleum export economies; and such economies are vulnerable to budge deficit troubles in case of any interruption in petroleum export. Inefficient budgetary systems often raise potential ...Download file to see next pagesRead More
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