The public deficit occurs when there is a negative difference between the expenses of a nation, on account of public investments, public debt, social expenses, administrative expenses, and the income received by the State through taxes (value added tax, on income, on imports, consumption tax, financial transaction tax, etc.). That is, we have a public deficit when states spend more than they earn. Otherwise, when income exceeds expenses, a public surplus is created.
State budgets
Every year public administrations must have a budget for their expenses on social and bureaucratic matters and investments in infrastructure and debt. When making these budgets, governments must take into account what sources of income will be used to finance these expenses. If spending plans are ambitious, governments should consider adjustments to their tax policy by increasing taxes or restructuring those they can, so that there can be greater collection, the latter we call tax reforms. If within the government budget the expenses exceed what is going to be received, then the government must consider that it will have a public deficit (or balance in the red) that it will have to cover with the issuance of public debt bonds or by borrowing directly. to international organizations.
How the public deficit is calculated
The public deficit is calculated taking into account the size of the national economy in which the reference State is located. If we say, for example, that the economy of the country “Valayú” has a size of 100,000 million dollars for fiscal year 2020, and the State of Valayú incurred expenses of 10,000 million dollars that year, and at the same time managed to raise 9,000 million of dollars in taxes, the difference in expenses and income is 1 billion dollars. Taking the national economy or its total GDP as a reference, we have that those 1,000 million dollars that the State overspent correspond to 1% of the GDP, which means that the public deficit was 1%.
Is the public deficit good or bad?
From the perspective of neoclassical economics, states should be minimum structures that guarantee legal stability and intervene as little as possible in the economy and markets. This is why it is considered that the State should not incur a public deficit, since it tends to to have to be financed by subsequent taxes on the population. If in the long term we have higher taxes to cover the debt that has been incurred to cover the deficit, the result will be economic stagnation. For this reason, from a neoclassical economics perspective, the public deficit is something that should be avoided at all costs. Apart from the fact that when there is a high public deficit in a nation, debt services become more expensive, since investors tend to consider it riskier to invest in a country with a high level of deficit.
From a Keynesian or neo-Keynesian perspective, States must have more flexible fiscal policies. This means that it is okay for the State to spend more than it earns, if this spending is used to finance economic growth with investments in schools, transport infrastructure, health, housing, research and development. From this perspective, a moderate public deficit, which has been incurred for strategic reasons for development, does not have to be a concern when inflation is controlled and the economy continues to grow, since greater economic growth means that in the future There will be a more solid economy that will be able to provide good resources via taxes to cover debts and the public deficit.
Differences between political parties regarding the public deficit
Political parties in Western economies have tended to divide into two factions, on the one hand there are the conservatives (also called neoliberals) and on the other hand we have the liberals (neo-Keynesians). Conservative political parties, such as the American Republican Party and the Tea Party movement, are averse to the public deficit and propose multiple strategies to reduce it, such as lower public social spending and higher taxes on the middle class. On the other hand, liberal political parties, such as the Brazilian Workers’ Party or the American Democratic Party, are more tolerant of the public deficit, since they consider that social expenditures are investments in the growth of the economy that will provide important returns. in the future.
In what sense is it important to reduce the public deficit?
When there is a large public deficit of nations that extends over the years, it has to be financed in two ways: The issuance of more local currency, which can cause inflation and loss of purchasing power of citizens, or through external credit, which generally has interests that vary according to the perception of risk that exists in the economy that acquires the credit. Credit rating agencies such as Fitch Ratings can classify a nation’s debt as good or bad debt, depending on factors such as the level of deficit, the taxes collected by the State and the economic growth of the nation in question. Payment of interest can, at times, be a very high burden for citizens, if the economy does not show important signs of growth, so it is important that nations try to reduce their deficits without neglecting public spending in economic sectors and activities that promote national development.
Public deficit in some countries
The public deficits of the main reference economies are the following:
Colombia: 2.7% of GDP
Mexico: 1.1% of GDP
United States: 3.9% of GDP
Brazil: 1.1% of GDP
Argentina: 6% of GDP
Venezuela: 46.1% of GDP (2017 figures)
China: 3.8% of GDP
Example of an economy without a deficit
We have cases of economies that do not present a deficit in their public finances. In this case we are talking about public surpluses. In the case of Norway, for example, its public surplus is 4.4% of GDP, which means that its income was 4.4 percent higher than its expenditure with reference to the National GDP.
Other examples of public surplus are:
Denmark: Surplus of 1.1% of GDP
Switzerland: 1.1% of GDP
Example of an economy without surplus or deficit:
Sweden is an example of an economy that has managed to make its expenses equal to its income: For fiscal year 2012, both the expenses and the income of the public administration of Sweden were 0.27 trillion dollars, so the deficit public was 0%.
