what is the name given to the situation where a government spends more than it will collect?

Question

The opposite of a government having a surplus.

Answer 1

It's called a "deficit" which is where the term "budget deficit" comes from.

Answer 2

A budget written where the government spends more than it actually has collected "runs" a deficit. Over time if the government continues to spend more than it collects accrues and is called "National Debt." Economist argue where the line should be drawn between an acceptable debt and one that is unhealthy. Our debt is "funded" with IOUs (Treasury Bills) sold and bought (regularly) by the government.

Answer 3

National Deficite

Answer 4

Deficit Spending.

Answer 5

Deficit spending.

Answer 6

Zimbabwe

Answer 7

A budget deficit occurs when an entity (often a government) spends more money than it takes in. The opposite is a budget surplus.

An accumulated deficit over several years (or centuries) is referred to as the government debt. Often, a certain part of spending is dedicated to paying of debt with certain maturity, which can be refinanced by issuing new government bonds. That is, a fiscal deficit leads to an increase in an entity's debt to others. A deficit is a flow. And a debt is a stock. Debt is essentially an accumulated flow of deficits.

Since debt is the total amount one owes, a deficit can also be defined as the amount by which a debt grows or a savings decreases. For instance, prior to the Second Gulf War, many Americans confused debt and deficit, believing that the United States government still had a massive deficit; in fact, the government had a sizable surplus. The deficit was gone, but the debt was still being paid down. Because the United States government counts money it collects through its Social Security program as income, many people had also become accustomed to the notion that the deficit was far larger than it actually was, yet, even removing Social Security funds, there was a surplus. (Although the Social Security program currently collects income, the money is considered "owed" to the people who pay into the program; eventually the fund will not be able to cover its own financial obligations.)

Debt formula

A formula to calculate debt, D, is:

D = RBt − 1 + Gt(r − g) − Tt

where R is the real interest rate, Bt − 1 is last year's debt, r is the interest rate, g is the growth rate, Gt is government spending, and Tt is tax revenue.

However the fiscal deficit of each nation will have its own factors influencing. For example the booming growth of India and China will directly reflect on the inflation due to influences in fiscal deficit.

[edit] Early deficits

Before the invention of bonds, the deficit could only be financed with loans from private investors or other countries. A prominent example of this was the Rothschild dynasty in the late 18th and 19th century, though there were many earlier examples.

These loans became popular when private financiers had amassed enough capital to provide them, and when governments were no longer able to simply print money, with consequent inflation, to finance their spending.

However, large long-term loans had a high element of risk for the lender and consequently gave high interest rates. Governments later tried to marketize their debts by issuing bonds that were payable to the bearer, rather than the original purchaser. This meant that someone who lent the state money could sell on the debt to someone else, reducing the risks involved and reducing the overall interest rates. Examples of this are British Consols and American Treasury bill bonds.

[edit] Structural and cyclical deficits

A government deficit can be thought of as consisting of two elements, structural and cyclical.

At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g. on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The need to borrow money at the low point of the cycle is a cyclical deficit. A cyclical deficit will be entirely repaid by a cycical surplus at the peak of the cycle.

A structural deficit is the deficit that remains across the business cycle, because general tax levels are too low for the general level of government spending.

The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus.

The idea of cyclical vs. structural deficits has come under criticism by those economists who believe that the business cycle is too difficult to measure to make cyclical analysis worthwhile.

[edit] Inflation and crowding out

Government deficits are not inherently inflationary. Historically, however, large government deficits have resulted in large and prolonged periods of inflation due to the monetization of government debt (monetary creation). As long as deficits are financed by the sale of government bonds (borrowing), they do not result in monetary creation, the principal cause of inflation. The theoretical causal link between the money supply and the price level is described by the quantity theory of money and most strongly advocated by Nobel prize winning macro-economist Milton Friedman.

Deficits can lead to inflation if governments choose to finance deficits through monetary creation rather than borrowing. This often occurs because the large taxes necessary to finance spending are politically infeasible, and there is insufficient demand for government debt, i.e. investors refuse to buy government bonds. In other words, no one will lend the government money. This is often the case in less developed nations whose economies are too small to tax effectively, but whose governments are considered too risky to attract investors willing to lend out of fear of default. Thus, monetary creation is often the only alternative available to finance spending.

Inflationary deficits are not limited to developing nations, however. Significant monetization of debt often occurs in developed countries as a result of minimal or no independence of a nation's central bank from its treasury. The central bank is a body which determines interest rates and the nation's money supply, while the treasury finances government expenditures through revenue collection (taxation) or borrowing. A central bank subordinate to a nation's treasury forced to borrow presents a conflict of interest that threatens to cause significant monetization of debt.

The lack of an independent central bank often leads to strong pressure from the treasury on the bank to purchase the treasury's bonds on the open market (essentially creating money) in order to bid up bond prices. This increase in demand (and consequently the price) for government bonds from the central bank leads to a decrease in the yield (interest rate) on the bonds. Note the inverse relationship between a bond's price and its yield. The yield on the bonds is essentially the cost of borrowing faced by the government. It is thus easy to see why a nation's treasury has a significant interest in the central bank maintaining low interest rates through monetary creation.

A nation's treasury has a further (but related) interest to pressure the central bank to buy government debt, creating money. As the treasury increasingly borrows (selling bonds), the increase in the supply of bonds leads to a steady decline in the bonds' price. As the price of the bonds falls, their yield increases, consequently increasing the government's cost of borrowing. Thus, governments face progressively increasing borrowing costs as deficits grow, and therefore have an increasing incentive to pressure the central bank to buy bonds to keep borrowing costs (interest rates) low.

This actually touches on arguably a more significant economic effect of large government deficits, i.e. higher interest rates. The massive sale of government debt raises interest rates across the economy, not just rates paid by the government, and draws available capital (economics) away from prospective private investments to the government. This problem is known as crowding out. Crowding out can actually result in lower investment and thus lower national income (gross domestic product), working against any increase in GDP resulting from the increase in government spending. This can be illustrated using Keynesian macroeconomic theory.

The United States is no stranger to pressure exerted on its central bank. During World War I and World War II, the U.S. Treasury put significant pressure on the Federal Reserve (America's central bank) to keep rates low. At the time, the Federal Reserve was much less independent from the Treasury than it is today, and massive monetary creation (and thus inflation) resulted in both instances. The inflation in World War II was considered desirable, however, as the Great Depression was plagued by massive deflation.

Most Western democratic nations have realized the inherent inflationary bias in a central bank under the treasury, and have taken significant steps to make their central banks much more independent in leadership and appropriations. An independent central bank is universally regarded by macro-economists to be positive for economic growth and the macroeconomy as a whole, as the bank is more free to set interest rate policy and contract or expand the money supply as it sees fit. Independence insulates the central bank from expansionary pressure from many sources for lower interest rates which in the short term may bring about lower borrowing costs and rapid growth, but in the long run may cause undesirable and economically harmful inflation. In fact, it seems that there is a direct relationship between the level of independence of a nation's central bank and a nation's level of inflation. More independent central banks seem to better control inflation, maintaining a much lower rate of increase in the aggregate price level.

It is unlikely today that the Federal Reserve or the central banks of other Western democracies will monetize debt as they have in the past, as a healthy fear of inflation has taken hold of central bankers and economists of all political persuasions the world over. It is estimated that a small percentage of U.S. government debt is monetized each year, though the effect of this on inflation is minimal. Less developed and democratic nations however still struggle with large government deficits, monetary creation, and high inflation.

[edit] Political implications

Since a deficit represents how much money the government is borrowing from other sectors of the economy, the size of a governmental budget deficit is often an important political issue as well as one of economic policy. Although fiscal conservatives often denounce deficit spending, many, such as American presidents George W. Bush and Ronald Reagan also place high priorities on military preparedness and tax cuts. Many conservatives have been accused of using "Starve-the-beast" strategies to reduce the role of the government: cutting taxes, which is often politically popular, reduces the amount of revenue the government has to spend; subsequent deficits, then, make budget cuts more politically popular. The conservative justification for cutting taxes, however, usually is that government should not seize people's money without sufficient cause, and that tax cuts can actually spur economic growth.

Keynesians argue that under some circumstances, deficit spending is justified; the government may spend money to stimulate the economy when individual investors are hesitant to.

[edit] Largest national budgets (2004)
National Government Budgets for 2004 (in billions of US$) Nation GDP Revenue Expenditure Exp / GDP Budget Deficit Deficit / GDP
US (federal) 11700 1862 2338 19.98% -25.56% -4.07%
US (state) - 900 850 7.6% +5% +0.4%
Japan 4600 1400 1748 38.00% -24.86% -7.57%
Germany 2700 1200 1300 48.15% -8.33% -3.70%
UK 2100 835 897 42.71% -7.43% -2.95%
France 2000 1005 1080 54.00% -7.46% -3.75%
Italy 1600 768 820 51.25% -6.77% -3.25%
China 1600 318 349 21.81% -9.75% -1.94%
Spain 1000 384 386 38.60% -0.52% -0.20%
Canada (federal) 900 150 144 16.00% +4.00% +0.67%
South Korea 600 150 155 25.83% -3.33% -0.83%