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.