Government Deficits and Debt
Introduced| English |
|---|
| budget deficit/ˈbʌdʒɪt ˈdefɪsɪt/ |
| budget surplus/ˈbʌdʒɪt ˈsɜːpləs/ |
| balanced budget/ˈbælənst ˈbʌdʒɪt/ |
| national debt/ˈnæʃənl det/ |
| government bonds/ˈɡʌvənmənt bɒndz/ |
| crowding out/ˈkraʊdɪŋ aʊt/ |
When a government spends more than it takes in
- Each year a government collects taxes and spends on programmes.
- If spending is above tax revenue, it runs a budget deficit 预算赤字.
- If revenue is above spending, it runs a budget surplus 预算盈余.
- Equal? A balanced budget 平衡预算.
A government runs a budget deficit when, in a year:
Spending above revenue is a deficit; below is a surplus; equal is balanced.
The national ______ is the total owed, built up from all past deficits.
Debt is the stock; the deficit is this year's flow into it.
To finance a deficit, a government usually:
It borrows by selling bonds to investors.
A deficit is a flow; debt is a stock
- The deficit is a flow: the gap for one year.
- The national debt 国家债务 is a stock: the total owed, built up from all past deficits minus surpluses.
- Think of a bathtub: the deficit is water flowing in this year; the debt is the water already in the tub.
- To finance a deficit, the government sells government bonds 政府债券 (it borrows).
Flow or stock?
The deficit is a flow (one year's gap); the debt is a stock (all past deficits added up). Each deficit adds to the debt; a surplus shrinks it.
The debt is 500 billion. This year the government runs a deficit of 20 billion. What is the new debt, in billions?
New debt = old debt + deficit = 500 + 20 = 520.
A budget surplus shrinks the national debt.
Taking in more than it spends, the government can pay debt down.
How the debt grows
- Each year's deficit is added to the debt: $\text{new debt} = \text{old debt} + \text{this year's deficit}$.
- Worked idea. Debt is 500 (billion). This year's deficit is 20. New debt $= 500 + 20 = 520$.
- A surplus would instead shrink the debt.
- Economists watch the debt-to-GDP ratio, because a bigger economy can carry a bigger debt.
One risk of large government borrowing is that it can:
Competing for loanable funds pushes rates up, squeezing private borrowers.
Why deficits and debt matter
- Borrowing competes with private borrowers for loanable funds, pushing up interest rates — crowding out 挤出效应 private investment (next lesson).
- Interest on the debt must be paid every year, using up future tax revenue.
- But deficits can be useful: in a recession, deficit-financed spending supports demand (expansionary fiscal policy).
- The concern is persistent deficits in normal times, not a one-off during a downturn.
A budget deficit is one year's shortfall (a flow); the national debt is all past deficits added up (a stock), financed by selling government bonds. Each deficit adds to the debt ($500 + 20 = 520$); a surplus shrinks it. Large persistent debt raises interest costs and can crowd out private investment.