Question

What is budget deficit and what is its optimal level?

Answer 1

The budget deficit is a situation where the government expenditure is more than governments income from taxes and other sources. For example, the government earned a total sum of $10 trillion in a year and proposed to do an expenditure of $1.1 trillion. That extra $0.1 trillion is the budget deficit of the government.

There is no optimal level of budget deficit but it keeps varying with the economic condition of the country. When the economic condition is low i.e. demand is low in the economy, unemployment is high and investments prospects are looking bleak. The government needs to spend more and bear high Budgetary deficit. On the other hand, when the economic condition is good a high budgetary deficit will cause inflation in the economy.

The ideal budget deficit is when the government ensures a right balance between the growth of the demand and manage its debt as well. The very low deficit will subdue the demand but keep debts in check, a high deficit will increase demand but also increase the debt.