Chapter 17: Problem 23

What is the difference between a budget deficit, a balanced budget, and a budget surplus?

Short Answer

Expert verified

A budget deficit occurs when a government's expenditures exceed its revenue, leading to a negative balance and potential borrowing to cover the shortfall. A balanced budget occurs when a government's expenditures equal its revenue, resulting in a balanced financial situation with no surplus or deficit. A budget surplus occurs when a government's expenditures are less than its revenue, leading to a positive balance, allowing for saving or debt reduction.

Step by step solution

Definition: Budget Deficit

A budget deficit occurs when a government's total spending (expenditures) exceeds its total revenue (income). In other words, the government spends more money than it collects through taxes and other sources, leading to a negative balance. This situation often requires taking loans to cover the shortfall, and can also lead to an increase in public debt over time.

Example: Budget Deficit

Suppose a government collects $10 billion in revenue but spends $12 billion on various programs and services. The government has a budget deficit of $2 billion, as its expenditures exceeded its income during the period. The government may need to borrow funds to cover this deficit.

Definition: Balanced Budget

A balanced budget occurs when a government's total spending (expenditures) equals its total revenue (income). In this case, the government spends exactly what it collects through taxes and other sources, leading to a balanced financial situation with no surplus or deficit.

Example: Balanced Budget

Suppose a government collects $15 billion in revenue and spends the same amount ($15 billion) on various programs and services. In this case, the government has a balanced budget, as its revenue matches its expenditures, and no borrowing is needed.

Definition: Budget Surplus

A budget surplus occurs when a government's total spending (expenditures) is less than its total revenue (income). In other words, the government spends less money than it collects through taxes and other sources, leading to a positive balance. This situation often allows the government to either save for future needs or pay off existing debts.

Example: Budget Surplus

Suppose a government collects $20 billion in revenue but spends only $18 billion on various programs and services. The government has a budget surplus of $2 billion, as its income exceeded its expenditures during the period. The government can now use this surplus to save for future needs or reduce its public debt.

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