Fiscal Deficits and How They Occur
Fiscal deficits occur when a government’s budget revenues are exceeded by its expenditure. In other words – when a government is spending more than it’s earning through taxes, seignior-age and other sources of income. Fiscal deficit is also a feature of expansive fiscal policy.
It can be caused by various elements. If an economy is going through a recession, less income may be generated through taxes than anticipated. In that case, a fiscal deficit could appear due to a smaller income and an unchanged level of expenditure. If a government decides to increase its level of spending (e.g. increase the wages of public sector employees), and by doing that exceeds its level of income, again fiscal deficit is created because the total expenditure exceeds total revenue. Also, fiscal deficit can be used as an economic tool to increase the level of economic activity. Even John Maynard Keynes, a great economic mind of the early 20th century , proposed that governments should use budget deficit to stimulate the economy during times of recession.
One very serious downturn of budget deficit is that it creates debt. Most budget deficits are funded through borrowing money from banks, investors and institutions, usually through loans, bonds and other financial instruments. Maintaining a policy of budget deficits for prolonged periods of time can increase debt and lead a country to serious financial problems, even bankruptcy.