Deficit Spending

Written By:
Paul Tracy
Updated October 20, 2020

What is Deficit Spending?

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 Deficit Spending Works

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 Deficit Spending is Important

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.