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What is a deficit?

The Federal Government has had a budget deficit when, in a given year, more money is spent than saved. In other words, when the Federal Government’s expenditure exceeds its income (its income is predominantly tax).

The difference between a deficit and debt 

You might have heard the phrase ‘debt and deficit’ in the news: it’s important to know the difference. Debt is the total amount of money the Federal Government owes. Alternatively, when the news mentions a budget deficit, it’s talking about the amount of money the Federal Government owes for one specific budget. 

So, deficit = bad? 

Yes and no. 

If you (as an individual) fell into debt, banks and whoever else you owe money to would eventually start demanding the cash. The situation is a lot different when it comes to countries. Why? Because countries, particularly wealthy ones like Australia, are seen as incredibly safe bets as their debt is issued in their own currency. Sure, individual people might go bankrupt, but it’s almost impossible to imagine Australia being unable to pay back its debts.  

Massive international investors – picture huge investment banks and even some other foreign governments – actually like giving governments like Australia money to spend. They know that in all likelihood they’ll get their money back eventually, and in the meantime, they receive neat little interest payments. 

Deficits can be deliberate 

Sometimes deficits are deliberate by governments and businesses in order to stimulate an economy during a recession or to foster future growth. During a recession (like the beginning of the pandemic), a government may run a deficit intentionally by decreasing its sources of revenue (like taxes), while continuing or increasing expenditures to provide jobs and income.

But there are risks

Inflation in the short term if it’s dramatic deficit spending (like during the pandemic last year). With a deficit, a budget surplus is needed (more tax revenue than spending) to pay off the deficit. This is called austerity and is generally unpopular as it can be economically challenging to cut spending and tax more and keep a good standard of living. 

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