Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Deficit Spending

What it is:

Deficit spending is spending that reduces or offsets a surplus. In the business world, the term often refers to situations where expenses exceed revenues, imports exceed exports or liabilities exceed assets.

How it works (Example):

Deficit spending creates fiscal deficits and trade deficits.

Fiscal deficits occur when a government's expenditures exceed its revenue. A government usually borrows money (by issuing Treasury securities or similar instruments) to fill the gap or "fund the deficit."

Trade deficits (also called current account deficits) occur when a country imports more than it exports.

Why it Matters:

Deficit spending is controversial. The famous economist John Maynard Keynes argued that it stimulated economies by giving governments the money to purchase goods and services and were thus particularly useful for getting countries out of recessions. However, many scholars also argue that governments should not engage in deficit spending regularly because the mountain of debt they create makes for unsustainable economies in the long run.