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What is a Fiscal Deficit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 September 2016
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A fiscal deficit is a situation in which the approved expenditures of a government entity are more than the amount of revenue that is generated by that same entity. When this phenomenon occurs, it is sometimes known as deficit spending, meaning that even though the expenditures are approved, income is not enough to cover costs if those expenditures are actually utilized. Often, the difference between expenditures and actual income is offset by transferring funds from a reserve account, borrowing from a national or federal reserve banking system, or by trimming expenditures so they are more in line with the actual income received.

There are two schools of thought regarding the fiscal deficit. In Keynesian economics, a situation of this type is not necessarily viewed as a bad thing. In fact, a fiscal deficit can be used to help stimulate the economy and help to lift a nation out of a period of recession. From this perspective, it is important to manage the deficit in a responsible manner, allowing it to grow to only a certain level and achieving a desired end. If the fiscal deficit is not managed properly, any benefits are overshadowed by the many problems that may arise when deficit spending is unchecked.

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Economists who are of a more conservative mindset tend to discourage the creation of any type of fiscal deficit for any reason. The goal should be a balanced budget where actual and projected expenditures are always kept in line with the amount of income received. This eliminates the need to transfer funds from a reserve or contingency account, allowing those funds to remain in place unless needed to meet emergency situations that are not covered in a budget. A balanced budget also minimizes the potential for borrowing funds from a federal reserve bank, effectively keeping the government entity stable and debt-free for the most part.

Different governments implement and follow various forms of fiscal policy. Some do see a fiscal deficit as a positive situation, as long as that deficit is managed and contained. Others consider the deficit a necessary evil, something to be tolerated but not actually promoted as a positive economic phenomenon. Still others operate from the stance that a balanced budget is always the goal, and all reasonable actions should be taken to avoid any type of deficit spending. By observing a fiscal policy that focuses more on managing government purchases so that federal debt is kept to a minimum, the fiscal effort become less cumbersome and requires less resources to manage and eventually retire that debt, effectively moving the government closer to a balanced budget.

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