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Budget Deficit

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Budget Deficit 

A budget deficit exists when a government's total expenditures exceed its revenues in a given year.

(Peter Dungan, Toronto  PPG1002H and Mankiw, N. Gregory, Ronald Kneebone, Kenneth J. McKenzie and Nicholas Rowe. 2008. Principles of Macroeconomics, 4th Canadian ed. Toronto: Thomson Nelson.)

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When the government is in deficit, it is said to be a source of “negative savings” which reduces the supply of loanable funds available in the market. Government deficits can therefore have the effect of increasing the interest rate and “crowding out” investment in capital. This is one of the most important negative consequences of sustained public deficits. It is important to recognize, however, that this problem is much less pronounced in a small open economy such as Canada than it would in a closed economy or a much larger one such as the United States. 

 

 


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