# Understanding Deficits: Definition, Types, Risks, and Benefits

> **Definition**
>
> A deficit is a financial situation where expenses exceed revenues, imports exceed exports, or liabilities exceed assets, often leading to increased debt for governments, companies, or individuals.

## What Is a Deficit?

In financial terms, a deficit occurs when expenses exceed revenues, imports exceed exports, or liabilities exceed assets. A deficit is synonymous with a shortfall or loss and is the opposite of a surplus. A deficit can occur when a government, company, or person spends more than it receives in a given period, usually a year.

### Key Takeaways

*   Deficits occur when expenses surpass revenues, or imports exceed exports, leading to a shortfall.  
    
*   Governments may run deficits deliberately to stimulate economic growth during recessions.  
    
*   Budget deficits contribute to the national debt, while trade deficits reflect more imports than exports.  
    
*   Running a deficit involves risks like currency devaluation and reduced economic growth.  
    
*   Despite potential drawbacks, deficits can finance public projects and stabilize employment during downturns.

#### What's a Deficit?

## The Dynamics and Implications of Financial Deficits

Whether the situation is personal, corporate, or governmental, running a deficit will reduce any current surplus or add to any existing debt load. For that reason, many people believe deficits are unsustainable over the long term.

On the other hand, the famous British economist [John Maynard Keynes](https://www.investopedia.com/terms/j/john_maynard_keynes.asp) maintained that [fiscal deficits](https://www.investopedia.com/terms/f/fiscaldeficit.asp) allow governments to purchase goods and services that can help stimulate their economy—making deficits a useful tool for bringing nations out of recessions.

Proponents of trade deficits say they allow countries to obtain more goods than they produce—at least for a period of time—and can also spur their domestic industries to become more competitive globally.

Critics of trade deficits say they create jobs abroad rather than at home, which harms the domestic economy and workers. Also, many argue that governments should not incur fiscal deficits regularly because the cost of [servicing the debt](https://www.investopedia.com/terms/d/debtservice.asp) uses up resources that the government might deploy in more productive ways, such as providing education, housing, or public infrastructure.

## Exploring Budget and Trade Deficits

The two primary types of deficits a nation can incur are budget deficits and trade deficits.

### Budget Deficit

A [budget deficit](https://www.investopedia.com/terms/b/budget-deficit.asp) occurs when a government spends more in a given year than it collects in revenues, such as taxes. For example, if a government takes in $10 billion in revenue in a particular year and its expenditures for the same year are $12 billion, it is running a deficit of $2 billion. That deficit, added to those from previous years, constitutes the country's [national debt](https://www.investopedia.com/updates/usa-national-debt/).

### Trade Deficit

A [trade deficit](https://www.investopedia.com/terms/t/trade_deficit.asp) exists when the value of a nation’s imports exceeds the [value of its exports.](https://www.investopedia.com/are-trade-deficits-inherently-bad-11724207) For example, if a country imports $3 billion in goods but only exports $2 billion worth, it has a trade deficit of $1 billion for that year. In effect, more money is leaving the country than is coming in, which can cause a drop in the value of its currency as well as a reduction in jobs.

## Key Deficit-Related Terms You Should Know

Along with trade and budget deficits, these are some other deficit-related terms you may encounter:

*   **Current account deficit**: When a country is importing more goods and services than it exports
*   **Cyclical deficits**: When an economy is not performing well because of a down business cycle
*   **Deficit financing**: Governments finance budget deficits by issuing bonds or printing more money.
*   **Deficit spending**: When a government spends more than the revenue it collects during a certain period
*   **Fiscal deficits**: When a government's total expenditures exceed the revenue that it generates, excluding money from borrowing
*   **Income deficit**: A measurement used by the U.S. Census Bureau to reflect the dollar amount by which a family's income falls short of the poverty line
*   **Primary deficit**: The fiscal deficit for the current year minus interest payments on previous borrowings
*   **Revenue deficit**: The [shortfall of total revenue](https://www.investopedia.com/terms/r/revenuedeficit.asp) receipts compared with total revenue expenditures for a government
*   **Structural deficits**: Occur when a country posts a deficit even though its economy is operating at its full potential
*   **Twin deficits**: Occur when an economy has both a fiscal deficit and a current account deficit

## Weighing the Pros and Cons of Financial Deficits

Deficits are not always unintentional or a sign of a government or business in financial trouble. Businesses [may deliberately run budget deficits](https://www.investopedia.com/ask/answers/021015/what-effect-fiscal-deficit-economy.asp) to maximize future earnings opportunities, such as retaining employees during slow months to ensure an adequate workforce in busier times. Some governments run deficits to fund large public projects or keep citizen programs running.

During a recession, a government may run a deficit intentionally by decreasing its sources of revenue, such as taxes, while maintaining or even increasing expenditures—on infrastructure, for example—to provide jobs and income. These measures aim to boost public purchasing power and stimulate the economy.

Running a deficit can lead to lower [economic growth](https://www.investopedia.com/terms/r/realeconomicrate.asp) or a weaker domestic currency. In the corporate world, running a deficit for too long a period can reduce the company's share value or even put it out of business.

## Current State of the U.S. Federal Budget Deficit

In September 2024, the Congressional Budget Office (CBO) reported that the federal budget deficit stood at $1.9 trillion, $373 billion more than the deficit for the same period the previous year.  

Regarding the national debt, the CBO projected that as of the end of 2024, federal debt held by the public (as opposed to the government itself) would reach 99% of GDP. The CBO also projected that debt will continue to climb, hitting 101.6% of GDP in 2025 and 122.4% in 2034.

## What Is an Example of a Deficit?

In a government, a deficit is an amount of spending that exceeds the amount of revenue or income.

## What Are the Different Types of Deficits?

There are many types of deficits, but regarding governments, there are budget and trade deficits.

## What Happens In a Deficit?

When a government runs a deficit, it spends more than it collects. This isn't always bad, but continuously running a deficit is believed to have adverse consequences. Businesses sometimes intentionally run deficits in their financial strategies but eventually will need to turn deficits into surpluses.

## Final Thoughts on Managing Deficits

A deficit occurs any time expenses exceed income. For personal finance, it's important to manage your financial deficits, ideally spending within your means and saving your money. Similarly, large government deficits aren't ideal but are sometimes necessary to fund government programs or public infrastructure.

> **Article Sources**
>
> 1.  Congressional Budget Office. "[Monthly Budget Review: August 2024](https://www.cbo.gov/publication/60592)."
>     
> 2.  Congressional Budget Office. "[An Update to the Budget and Economic Outlook: 2024 to 2034](https://www.cbo.gov/publication/60419)."
>     
> 3.  Congressional Budget Office. "[An Update to the Budget Outlook: 2023 to 2033](https://www.cbo.gov/publication/59096)."