Government Budgets

 

Terminology and Definitions

1. A nominal deficit is a shortfall of revenues over payments in one year.

2. A nominal surplus is an excess of revenues (receipts) over payments (expenditures) in one year.

3. Debt is accumulated deficits minus accumulated surpluses.

4. A real deficit is the nominal deficit adjusted for inflation each year; inflation is wiping out some of the debt. Real deficit = nominal deficit – (inflation x total debt)

5. What is more important than the size of debt is the debt-to-assets ratio, or the debt burden. This is because the size of the debt means nothing if you do not have an amount of assets to compare it to.

6. Economists frequently consider debts and deficits relative to the size of GDP, because this better demonstrates the government’s abilities to handle its deficits and debt. Debt service = (interest rate paid on debt) x (total debt); it helps to give a better picture of the debt burden (debt relative to GDP).

 

Advantages of Government Debt

If a government runs a deficit in order to spend on projects that increase the society’s assets, and if these new assets are valued at more than their costs, then having the deficit makes the society better off.

 

Disadvantages of Government Debt

1. If there is excessive borrowing, which leads the debt burden to be too great, then the government will be strained in its ability to repay.

2. The government can be wasteful and inefficient, which can cause more harm than good when it attempts to influence economic events.