Lower production: Deficits can also be caused by simply not having or producing as much as someone else, such as in the case of a points deficit in sports.That's because factors such as layoffs and pay cuts can lead to less income tax collections, and stock market drops can reduce capital gains taxes. ![]() For example, a recession could cause tax revenues to plummet, so even if the government planned to spend less than it taxed, that might not always pan out. Unintentional deficits: Sometimes a government or company gets into a deficit (or a larger deficit than intended) due to unexpectedly spending more than anticipated or by collecting less revenue than planned.For example, in recent years, when the federal government sets its annual budget, it knowingly projects the annual deficit based on spending intentions outpacing projected revenue. Purposeful deficits: In some cases, those who get into a deficit do so willingly.Some causes of deficits include the following scenarios: Causesĭeficits are caused by spending more than what you take in, or by generating less than a designated benchmark. Much depends on specifics like the size of the deficit and why it might exist, such as to feed consumer demand. Note: Trade deficits aren't necessarily about winning or losing. I agree with the first but also do not entirely disagree with the second," says Torras. But there are some - we call them neo-mercantilists - who believe that exporting countries are stronger than importing countries. "Most economists believe that the most important thing is that trade deficits or surpluses should not be too large. With trade deficits, a country in deficit imports more goods and services than it exports to another country. ![]() In theory, that would leave state governments without a deficit or surplus, but projections might be off, or the rules might not be strict enough to avoid deficits. This can occur at various levels of government, though some non-federal governments have rules that aim to prevent deficits, such as balanced budget amendments at the state level. Two of the most common types of government deficits include budget deficits and trade deficits.Ī budget deficit occurs when a government spends more than it receives, primarily from taxes. Even if this capability is rarely used, the option exists. Note: The federal government has the ability to print money to shrink deficits. Plus, the government has more levers to pull to affect the impact of deficits, such as raising taxes to shrink deficits. That's not to say that the government will definitely print more to spend as much as it wants, but it essentially gives the government more leeway to spend than an individual could. The federal government not only has far more access generally to borrow money to cover deficits, but it can also print money to close any gaps. Deficits create debt, but debt is a measure of what's owed at a specific point in time based on the accumulation of deficits, Torras adds. ![]() "This is because government deficit spending is typically employed in response to a weakening economy."ĭeficits are typically measured over distinct periods, such as quarterly or annually. "Absence of deficits could concern the average person more than deficits themselves," says Mariano Torras, Ph.D., Chair, Department of Finance and Economics at Adelphi University. And deficits can be personal, corporate, or even governmental in nature. Understanding how deficits workĭeficits comprise two distinct measures, with one being the baseline number you're trying to reach and another being the current amount that's below that baseline. And, when referring to government deficits, politics can play a role in terms of how people view the impact of deficits. While a deficit implies a shortfall, you shouldn't assume that all deficits are bad or that a large deficit is automatically worse than a small deficit. Oftentimes, however, the term deficit applies to governments, such as with trade deficits between two countries or budget deficits when spending outpaces tax and other revenue sources. A basketball team could have a deficit of 10 points if they're down 80-70 in the fourth quarter, or you could have a personal budget deficit of $1,000 if you're bringing home $5,000 per month but spending $6,000. A deficit can be any type of negative gap between two benchmarks.
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