One example of this is the budget that former Republican President Donald Trump announced in February 2020, which included a $4.8 trillion reduction in spending on things like Medicare, Medicaid, and Social Security. Reducing spending usually means cutting spending on government programs. On a national scale, there are a few ways to go about both of these goals. There are two ways to reduce a budget deficit: Spend less money or make more money. All of these can have a significant impact on the economy. Foreign countries might worry about the government printing more money to meet its obligations, reducing the value of its currency. If the budget gap grows too large, investors might be unwilling to buy government bonds, increasing borrowing costs further. Long-term budget deficits can also lead to changes in consumer expectations and behavior. That can make it even harder for it to balance its budget while maintaining critical services for its citizens. If a country runs a budget deficit for a sustained period, it will wind up with a large amount of debt, saddling it with significant interest obligations. To reduce its costs in the next year, the government would need to cut expenses by more than the interest that its new loans charge. A budget deficit in one year means that the government’s expenses will likely be higher the next year thanks to interest costs. When governments borrow money, they also need to pay it back over time. Consumers have more incentive to save money when rates are high, reducing consumer spending, which can shrink the economy. This can give those countries influence over the government’s policies.ĭecreased saving can also lead to higher interest rates, which can weaken an economy. Often, the government will turn to foreign nations to borrow money. One effect of a federal budget deficit is a decrease in national savings and increased borrowing. However, when the government runs a budget deficit, there is a risk of long-term damage to the nation’s economy and potential runaway inflation. Even if they struggle to find lenders, governments can often print currency to meet their expenses. Eventually, they will build up a large enough debt balance that they won’t be able to find willing lenders, or they will run out of savings to finance their shortfall.įor some governments, this is less of a risk because they may have a strong credit rating that makes it easy for them to borrow vast sums of money at a relatively low/stable rate. Neither of these options is sustainable for the average person if they continue to run a budget deficit. The other is to spend $10,000 out of their savings. One is to find somewhere to borrow $10,000. If a person expects to make $40,000 in a year and spend $50,000 in the same year, there are two ways to handle this. One of the primary risks of a budget deficit is that the organization with the deficit will be unable to pay its budgeted expenses. This leads to individual legislators sometimes promoting spending in their district even if they generally prefer reduced government spending. The legislator’s constituents could benefit from the increased spending, while the cost of the expenditure may be spread across the entire country. Because some governments can print money to cover shortfalls, they can postpone or some stronger countries can avoid paying back deficits - though, printing too much money can ultimately lead to inflation.Īnother explanation for overspending is that there is a hefty incentive for legislators to promote laws that involve spending on their constituents. One of the significant risks of having a budget deficit is coming up with funds to cover the gap. In other cases, the government is unwilling to raise the tax rate sufficiently or may want to implement tax cuts to earn goodwill from citizens.Īnother reason that governments spend more than they make is that some can easily borrow or print money. Governments spend billions or trillions of dollars each year, and it can be difficult for them to figure out what tax rate they need to charge to bring in enough revenue to cover expenses. The most basic is that the government has more things that it wants to spend money on than it can afford to pay for through tax revenues. There are a lot of reasons why governments overspend.
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