In the economy, the budget deficit occurs at a time when the amount of income becomes less than the size of expenses. The reverse situation is a surplus.
Deficit, surplus and balance
If the state allows a budget deficit, then a crisis may occur in the economy. The ideal situation is when income and expenses are equal. Thus, a budget balance is achieved. Each state does everything possible to get closer to it.
Incomes can be not only tax revenues, but also borrowings (for example, loans, etc.). The problem is that if the balance cannot be achieved, then such a budget cannot be implemented and distributed at all. But deficit is only one of the possible problems that the state may face. In the case of a surplus, when the revenue part exceeds the expense part, negative consequences may also occur. Its result is reduced efficiency in the use of funds from the country's budget. Which leads to disruptions in the economy. Therefore, the only way to resolve the budget deficit is to achieve a balance in the budget.
The balance is needed primarily for the normal operation of various state institutions - governing bodies, territorial and administrative entities. The budget deficit leads to the fact that sooner or later the funds run out and the financing of budgetary institutions - schools, hospitals, etc. is suspended.
Lack of money in the treasury is fraught with disruption of municipal and state orders, the occurrence of non-payments to staff working in business institutions. A theoretically ideal option for a country would be a fully balanced budget. However, the real economy is such that achieving this is sometimes extremely difficult. In this case, the state resorts to the use of various sources of financing.
Domestic financing
There is a large group of internal sources where you can get money to finance holes in planning for next year. Whatever the reasons for the budget deficit, the Ministry of Finance can help out proceeds from securities owned by the state. Also resort to receiving budget loans. Money is spent to cover expenses. When the situation stabilizes, borrowed funds are returned.
If the state pledged its funds to capital, then it can sell part of its shares to some large enterprise. In the case of the most severe budgetary shocks, the country will sell its stock of precious stones and metals (gold, silver, platinum). These reserve funds are stored separately, they are resorted to in the most extreme case.
Cash financing
In addition, the federal budget can be replenished by external sources of financing. Such may be the funds received in the treasury from the sale of government securities. For greater benefit, they are converted to convenient foreign currency.
Credit has already been mentioned above. In the case of domestic financing, they are taken from the domestic central bank. However, loans can be issued by international funds. And then we are talking about external financing. For example, this was the case in Russia in the 90s.
Getting loans is a sign of cash financing. The state receives additional funds that are issued into circulation. There is a special term for this phenomenon. This is an issue that is used only as a last resort.Turning on the money machine means increasing inflation in the country. New funds cover that budget hole that is not provided by the production of real goods and services. An increase in the mass of the national currency in the market depreciates it.
Such sources of budget financing lead not only to inflation, but also to the psychological “Tanzi effect”. This phenomenon is a massive reluctance of citizens to pay taxes. People postpone the calculation in order to wait until the moment when the money depreciates even more (so that obligations to the state do not hit the wallet so much). All these interrelated events, the cause of which is the budget deficit, further shake the country's fragile economic stability.
If inflation goes out of control, then it develops into hyperinflation. This happened in the Weimar Republic in Germany after the defeat in the First World War, when the country's enterprises were destroyed, and the government, among other things, had to pay huge indemnities to the Entente powers. Then the consequences of the budget deficit were expressed in the degradation of the entire monetary system. The savings of the population depreciated, which led to mass impoverishment, exacerbated by unemployment, even in large cities.
Debt financing
But, in addition to money, there is also debt financing. It is carried out by the state by issuing its own revenue obligations. These securities appear in the domestic stock market. In fact, the state borrows money in the private sector and pays off after the budget deficit and surplus remain in the past.
Debt financing is not as painful for the economy as money. However, it also has its drawbacks. If market participants carry their funds to the state, then, therefore, they stop investing in the real sector of the economy. This leads to a decrease in the level of activity and a slowdown in the growth of the country's welfare.
Causes of deficiency
What can cause the federal budget to withstand the load? The deficit arises for various reasons, but most often it is caused by the restructuring of the entire state economic policy. For example, a similar situation was observed when Russia was rebuilding to a market economy, abandoning five-year plans. The emergence of private property and the ruin of budgetary enterprises led to a decrease in income and an increase in expenses. In addition, the budget law at that time was adopted with enormous effort each year. There was a strong opposition in the parliament in the person of the Communists and some other parties, which blocked the government’s proposals regarding the distribution of funds.
Deficit is inevitable in case of emergency, be it wars, natural disasters, social unrest, etc. Bloodshed and disruption of the usual course of peaceful life do not allow people to work and make a profit, both in the public and private sectors. In the event of natural disasters, the budget of any developed state always has a special fund, but if the scale of the incident is too large, then the calculated funds may not be enough to correct the consequences of the tragedy. In this case, you have to take money from other items of expenditure (for example, for education), which cannot but hit financing other important areas where the state must monitor the fulfillment of its obligations to society.
Corruption and tax policy
The economic system may be misplaced due to the populism of politicians. For example, if after an election a party comes to power that promises to increase pensions, etc., then it will have to restructure the budget. Moreover, in almost all such cases, increased funding for one article leads to a lack of funds in another.Any budget law will not work if the state cannot get rid of corruption within its departments.
Negligent officials redistributing taxpayer funds in their interests undermine the country's economy. And the point here is not at all the so-called everyday corruption, when a public servant takes money directly from citizens (for example, for entering a university). As a rule, the largest thefts occur through tenders for state orders (construction, implementation of infrastructure projects, etc.). Due to such corruption, the government has to spend more on fulfilling its social obligations. All budget items are interconnected, so if today money is not being calculated somewhere, then tomorrow it will hit financing in a completely different sector.
Finally, the last reason for the deficit is an inefficient tax policy. An increase in fees from businessmen in the private sector can lead to the emergence of a shadow sector of the economy. The low welfare of society is also the reason for the growth of crime, which is taxing, and ultimately reduces the amount of state revenue. All this can result in various negative phenomena, among which inflation is the most obvious and noticeable. In this case, the budget deficit affects all sectors of the economy.
Classification of the budget deficit
Budget deficits in each case differ from each other. This is a complex multifaceted phenomenon. There are several classifications of such economic “subsidence”.
The deficit can be real or accidental. Sometimes improper allocation of funds can lead to a lack of money in the budget. This is an occasional shortage. You can get rid of it quickly. Random, or cash, deficits are most common in regional budgets highly dependent on the center. If the regions do not have economic independence from the capital, then the funds go to the government first, and after that they are already distributed throughout the country. If the provinces keep a part of the tax revenues and decide for themselves what to spend it on, then the probability of an accidental deficit is reduced significantly. This is also why, in all democratic countries, voters are trying to achieve independence of the municipal government from the federal one.
The actual deficit is more complex. It arises from deep contradictions in the economy. This lack of balance to “patch” is much more difficult than in the above case. For example, a real deficit can arise in the case of an incorrect distribution of income, when the government spends too much money on defense and the army, but does not want to invest in the real sector of the economy, which could bring profit over time.
When the Ministry of Finance determines the composition of income and expenses for the next year, the actual deficit is laid down in the plan as the maximum permissible value. Next comes the budget execution period. If the government calculated the available funds correctly, then a real deficit will not occur. Of course, various extraordinary circumstances may arise that require additional cash infusion. But in this case, we are already talking about checking the stability of the country's financial system.
For example, in Russia in 2000 it was created and regularly replenished. national welfare fund. Funds from this "wallet" are spent only as a last resort, when it is necessary to finance the budget deficit.
Other species
According to another classification, the budget deficit is divided into temporary and chronic. The last of them can be repeated from year to year for fundamental economic reasons. Chronic deficiency is usually the result of a long crisis. For example, it may be associated with the collapse of the banking system.
A temporary deficit arises in the case of small fluctuations in the situation - falling prices for exported goods, etc. Such crises are overcome by reserves. But even they, with inept economic management, can develop into something serious and chronic.
There are other types of budget deficits. For example, one that appears in the event that a lot of money is spent on paying off government debt. Then the budget deficit is considered secondary. The primary one arises due to the excess of expenses over income.
Budget deficit management is sometimes laid down in advance in budget items for the next fiscal year. Similar situations arise if the government does not see a way out of the crisis and is ready to take responsibility for a future shortage of money. Such a budget deficit is called planned. If the state announces the impending lack of income in advance, it will thus mitigate the blow compared to if the crisis came unexpectedly for the whole country.
State debt
When the government tirelessly continues to take loans, it itself becomes a major borrower in the market. Public debt is the sum of money borrowed by the state from individuals and legal entities, international organizations, etc. If the budget is adopted with a deficit, then, accordingly, expenses for fulfilling the government’s own obligations will increase.
Moreover, the very presence of public debt is not an indicator of the critical state of the economy. All countries have it. The US has even more debt than Russia. However, this does not mean at all that the American economy is in crisis, and there are huge holes in the budget of this country. The criticality of public debt depends only on how efficiently it is paid. The US government regularly fulfills its obligations to creditors. Therefore, his debt is at a constant high level, as the state is given money with confidence that it will pay off.
In the 90s, Russia had to live with a constant budget deficit. The government increased public debt to cover the lack of equity. These obligations were enshrined in agreements, contracts and securities. Often, the state resorted to the extension (extension) of its own debt in order to defer payment and re-engage in a deficit budget.
The effects of the budget deficit
Of course, the budget deficit in most cases is considered as a negative phenomenon. This is primarily due to almost inevitable inflation. However, the experience of different countries shows that in some cases the budget deficit, on the contrary, is even useful for future welfare.
For example, if there is a recession in society, then the government can increase public procurement. Thus, it creates a budget deficit. But with the advent of procurement, a new market is also being created, which, in turn, creates jobs and reduces unemployment. In this case, the appearance of a deficit only stimulates private entrepreneurial activity. People, when they see new opportunities, are willing to create companies in empty niches where state demand appears.
All this translates into economic growth. Of course, this process is long-term. From government procurement and budget deficits should not be expected to quickly get rid of the economic crisis and unemployment. But in the long run, this method raises the real gross domestic product.
Therefore, the government in some cases may adopt a deficit budget in order to overcome the economic crisis that has arisen in the future. This method is extremely painful for civil servants, whose salaries may decrease, but sometimes such measures are the only way out of the abyss of inflation and unemployment.
In most modern countries, budgets are in advance taken in deficit. In some states, this is due to the unstable economic situation. Other governments may resort to budget deficits in order to avoid cyclical crises caused by regular tax increases that are necessary to balance spending and income.
