Definition
Deficit spending occurs when a government spends more money than it collects in taxes and other revenue over a given period. The shortfall is the budget deficit, and it is funded by borrowing, usually through the sale of government bonds.
Running a deficit is not the same as having a debt. The deficit is the gap in a single year, while the national debt is the accumulated total of all past deficits net of any surpluses. Persistent deficits cause the debt to grow over time.
Why it matters
How it works
In a downturn, tax receipts fall while needs for unemployment benefits and stimulus rise, so deficits widen automatically and by design. The government issues bonds, and the borrowed money funds spending that supports demand and employment, an example of expansionary fiscal policy. Many economists argue this is appropriate when the economy is weak, since the spending can pay for itself by reviving growth. The same economists often caution against large deficits when the economy is already strong, because the extra demand may simply fuel inflation while adding to the debt.