Definition
A budget deficit is the gap between a government's outlays and its revenues over a fiscal year. When spending exceeds taxes and other income, the government runs a deficit and must borrow to cover the difference; when revenue exceeds spending, it runs a surplus.
A deficit is a flow measured for a single period. The accumulation of past deficits, minus surpluses, is the stock known as the national debt — a distinction central to clear thinking about public finance.
Why it matters
How it works
Governments cover deficits by issuing bonds — borrowing from domestic and foreign investors. During recessions, deficits often widen automatically as tax revenue falls and unemployment spending rises; deliberate stimulus widens them further. Economists distinguish this cyclical component from the structural deficit that persists even at full employment.
The key policy question is sustainability. Borrowing to fund infrastructure or counter a downturn can raise future output and pay for itself; chronic borrowing for ordinary spending steadily raises debt relative to income. The debate over acceptable deficits is among the most enduring in macroeconomics.