What Are Some Disadvantages of the Budget Deficit?

Written by david ingram Google
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What Are Some Disadvantages of the Budget Deficit?
A budget deficit can lead to a cycle of borrowing. (chart image by DXfoto.com from Fotolia.com)

Governments collect income through tax revenue, debt instruments and a range of other sources, and they spend money on public services and infrastructure investments, among other things. When a government's expenditures exceed its income for a given budget period, this is a budget deficit. Maintaining a budget deficit means there is never money left over after paying expenses, which can put governments at a disadvantage in a number of ways.

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Crowding Out Effect

A budget deficit can cause the government to increase its reliance on borrowing from foreign sources. As this happens, future budgets can place more emphasis on loan repayments and less emphasis on savings and investment. This chain reaction, called the crowding out effect, can eventually lead to a situation where the federal government allocates less money to investments, such as public education and the highway system, placing more of a burden on state, county and local governments.

Future Debt Burden

An often-cited reason for reducing the budget deficit is the burden it places on future generations. Since deficits tend to increase borrowing, which accrues interest over time, the current generation tends to reap the benefits of the borrowing and a future generation gets the bill. If the attitude of temporarily covering financial problems and leaving the next generation with the damage were to continue over several generations, the nation could find itself in a situation where it could not possibly climb out of its debt.

Tax Hikes

To fund short-term measures to correct budget deficits, there must be reduced government spending or increased taxes. This can create a situation where people pay more taxes for fewer government services, which can cause internal political problems for the nation. As the stewards of citizens' tax money, government officials owe it to the people to manage their money wisely, ensuring that federal, state and local expenditures consistently come in below their budgets.

Political Ramifications

One strong advantage of a budget surplus is the ability to tap sources of money for emergencies. Unplanned expenses for things like natural disaster relief and military emergencies can incur large, short-term expenses. If the federal government maintains a budget deficit, it will likely need to look to foreign sources of capital to cover emergencies. Not only does this increase the cost of government investment by adding interest charges into the mix, it incurs political "debts" that may be called in sometime in the future.

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