A budget deficit is an excess of the expenditure side of the budget over the revenue side. With a budget deficit, the state does not have enough funds for the normal performance of its functions. Ideally, any budget level should be balanced. But there are many factors that prevent this from happening.
Instructions
Step 1
Remember that the budget deficit can be associated not only with extraordinary factors, for example, with the occurrence of natural disasters or wars, the costs of which cannot be foreseen in advance, but also for other reasons. A deficit can arise, for example, in a situation when it is necessary to make large state investments in the development of the economy, which reflects the growth of the country's gross domestic product rather than its crisis state. In general, there are several reasons for the budget deficit:
- reduction in national income due to the economic crisis;
- reduction in the amount of excise taxes received by the budget;
- a sharp increase in budget spending;
- inconsistent financial policy of the state.
Step 2
Keep in mind that in countries with a fixed amount of money in circulation, there are two main ways to reduce the budget deficit - issuing government loans and tightening the tax regime. In states where the money supply is not constant, there is another way - the emission of money. However, this method is fraught with accelerated inflation rates. At present, with a similar purpose, reserves of commercial banks are being created, which are concentrated in the Central Bank and can be used to cover the budget deficit.
Step 3
Do not forget that in modern conditions there are three main approaches used in solving the problem of the budget deficit. The first assumes that the budget must be balanced annually. However, such a policy limits the possibilities of the state if its activity has a countercyclical, stabilizing direction. Let's consider an example. A period of unemployment has begun in the country, therefore, incomes of the population are falling, and hence tax payments to the budget. In this situation, the state needs to raise taxes or cut expenditure items. However, as a result of such measures, aggregate demand will decrease even more. Thus, the annually balanced budget is not countercyclical, but procyclical.
Step 4
The second approach assumes that the budget should not be adjusted annually, but in the course of the economic cycle. This concept assumes that the state should carry out a countercyclical impact and at the same time balance the budget. The logic behind this concept is simple: to prevent a recession, the government cuts taxes and increases spending items, i.e. deliberately creates a deficit. In the subsequent period - the period of inflation - taxes increase, and government spending decreases. All this leads to an excess of revenues over expenditures, which means that the budget deficit that arose earlier is covered.
Step 5
The third approach involves the application of the concept of functional finance, i.e. the goal of the state is not to regulate the budget, but to ensure a balanced economy, which can be achieved with any deficit or surplus. Please note that the first concept of budget stabilization is applied in our country.
