Government's Budget Deficit

Definition

The government's budget deficit refers to the situation when the government spends more money than it collects in revenue during a specific period, usually a fiscal year.

Analogy

Imagine you have a monthly allowance of $100, but you end up spending $120. This creates a budget deficit for you because you spent more than what you had. Similarly, when the government spends more than it earns, it results in a budget deficit.

Related terms

National Debt: The total amount of money that the government owes to its creditors due to accumulated budget deficits over time.

Fiscal Policy: The use of government spending and taxation policies to influence the economy.

Crowding Out Effect: When increased government borrowing leads to higher interest rates and reduces private sector investment.