What is a budget deficit?

If a country is in a budget deficit, it affects all citizens including individuals, businesses, and the economy. Since the government budget is forced to adapt to lessen the national debt, spending needs to be cut and central banks are forced to raise inflation. This reduces the spending power of individuals and can lead to significantly less economic growth. 

In this article, we’ll cover what a budget deficit is, what it’s caused by, and Australia’s handling of its budget deficit. 

Let’s get to the following commonly asked questions: 

• What is meant by budget deficit?
• What causes budgetary deficit?
• What is an example of a budget deficit?
• What is Australia's budget deficit?
• 3 ways of financing budget deficit
• What is the difference between fiscal deficits and budget deficits?

Q1. What is meant by budget deficit?

A budget deficit occurs when expenses exceed revenues. In economics, this means that government revenue (usually gained through tax revenues) is less than its spending in a given year. 

Countries need to carefully balance income and expenditure to avoid falling into budget deficits. Governments can achieve a balanced budget by reducing government spending. If this is impossible, they might choose to raise taxes to boost the total income instead. 

Q2. What causes a budgetary deficit?

A government deficit is caused when government spending increases while government income remains low. When spending exceeds income, governments find themselves in a cycle of deficit and debt. 

After the fiscal year, any deficit caused by the government is added to the national debt, which can cause increasing taxes and higher price levels which can halt economic growth and negatively affect the personal finance of individuals. In this instance, countries must cut spending and raise tax rates to reduce budget deficits.

Q3. What is an example of a budget deficit?

As of 2023, the USA, UK, China, and Australia are all in a budget deficit, and most major countries' government expenditures outweigh income. 

Let’s look at an example. 

In 2020, the US earned a total amount of  $5,923,829 TN, from sources of revenue such as income tax and corporate taxes. However, the government’s expenditures reached $9,818,534 TN, meaning the US government deficits reached $-3,894,705 TN. The total deficit percentage was therefore -18.73 percent. 

But was Australia able to perform budget balances? Let’s take a look.

Q4. What is Australia's budget deficit?

Australia has been in a budget deficit since 2007, and the current national debt is $895 BN. Experts expect that Australia will remain in a national deficit throughout the next decade, through to 2033. 

Throughout 2023, increasing commodity prices alongside a strong labour market will see a predicted $42 million boost to Australia’s budget over the next four years, and the budget deficit is expected to be halved by the end of the fiscal year.

Unfortunately, experts predict that this won’t go far enough, and rapidly increasing spending pressures will worsen the deficit over the year. As Australia tackles a budget crisis. By the end of 2023, the cash balance is predicted to be in a $39.6 BN deficit.

Q5. 3 ways of financing budget deficit

So, what methods does the Australian government use for reducing the budget deficit? Balanced budgets don’t just involve increasing tax revenue. The Australian government predominantly uses these three methods to finance the budget deficit. 

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1. Borrowing money from overseas. The Australian government borrows money from overseas to help reduce the federal deficit. By using overseas loans, it allows Australia to access large amounts of capital from high-saving countries at a lower interest rate.

2. Selling government bonds. By selling government bonds to domestic investors, Australia can access more capital while paying periodic interest repayments to bond owners. 

3. Quantitative easing. The Australian Reserve Bank is able to print more money to reduce the value of government debt, making it easier to pay off. However, this is one of the riskiest strategies to reduce budget deficits as it can cause hyperinflation.

Q6. What is the difference between fiscal deficits and budget deficits?

A fiscal and a budget deficit mean the same thing. It’s the difference between government spending and its revenue. If spending outweighs revenue, governments face a budget deficit. In contrast, if revenue outweighs spending, governments will find themselves in budget surpluses, which are used to pay off the national debt. 

Summing up

Government budget deficits are caused when increasing government spending exceeds revenue. This can be significantly damaging to national economies and contributes to government debt which can not only cause economic instability but inflation. 

Australia has been in a budget deficit since 2007, using methods such as quantitative easing, selling government bonds, and borrowing money from overseas to curb the national debt. 

For more up-to-date financial information, check out our blog here. Alternatively, read our latest article on ‘Important Australian debt statistics’.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.