What Is a Budget Crisis?

A budget crisis occurs when different branches of a government are unable to reach agreement on establishing a government budget. As a non-profit entity, a government typically strives to have a balanced budget, which means that it aims to generate enough revenue to cover its expenses. A budget crisis often occurs when government expenses increase or revenues decrease and members of the government are unwilling to increase taxes or reduce spending to balance the budget.

In many countries, there are two distinct sections of the national government: the head of state and the regional representatives. Generally, both the head of state and the regional representatives must reach agreement for a budget to be passed. Disagreements among the regional representatives can prevent a budget from even being presented to the head of state if the representatives cannot reach a majority conclusion. If the representatives do reach a consensus, the budget crisis still might continue if the head of state refuses to agree to the budget.

Governments mainly rely on one source of income: taxes. Although different political parties around the world have different ideologies, as a rule, people who are in favor of minimizing government spending are known as fiscal conservatives. People who favor raising taxes to increase government services are generally referred to as liberals. In a budget crisis, an impasse usually is caused because conservatives propose spending reductions while liberals propose tax increases.

A government must have a budget in place in order to function on a day-to-day basis. When a budget expires, a budget crisis can cause a government shutdown. Government employees typically are not paid during a government shutdown, which means that government services largely cease. This can cause widespread problems throughout the nation because members of the military, postal workers and air traffic controllers usually are employees of the national government. Until the budget impasse is resolved, the public often must make do without some basic services.

In order to prevent a country slipping into chaos during a budgetary stand-off, most countries have emergency cash reserves to keep certain branches of the government running in the absence of a budget. Generally, government employees who process pension payments as well as people who are involved in national security continue to work and receive their pay, but other government employees are not able to work. When government employees are not paid, the government receives even less tax revenue, which only serves to exacerbate the problem.

A budget crisis can have damaging effects on a nation’s ability to borrow funds from creditors and other countries because debt payments are not made during a budget crisis. Countries must have good credit in order to borrow, and late payments as well as missed payments can cause a country's credit rating to fall. Consequently, it becomes much more expensive for a nation to borrow money in the future because creditors view the nation as a high-risk borrower.