Series 7: 9.1.2.5 Budget Deficits And Interest Rates

9.1.2.5  Budget Deficits and Interest Rates

When a government’s spending equals its revenues, it has balanced its budget. When government revenue exceeds government expenditures, it is called a surplus. A surplus is often used to pay down debt, save for the future, or increase programs that benefit the public. When a government spends more than it brings in through taxes, a budget deficit is created.

Budget deficits can be structural or cyclical. Structural deficits are long-lasting and they exist in every stage of the business cycle. Structural debt is caused by government obligations that are fixed in nature, such as excessive interest payments on long-term debt, military expenditures, and/or entitlement programs. Cyclical deficits, in contrast, grow in recessionary periods and decline during an economic expansion. When the economy is in a period of