NATIONAL BUDGETS

A country's budget is one of the primary concerns of a country, if not the most primary. A country can either have a budget surplus or a deficit. A budget surplus in any given year means that the government received more money than it spent while a deficit meant that the governmnet spent more money than it received. A debt accumulates as the government uses deficit spending. Everytime the government spends more than it has, it must borrow money and that debt keeps building. For example, if the government has three years of budget deficits of $20, $30, and $35, then the government has accumulated a debt of $85.

Running a limited deficit is often a good idea for a government. When the government spends a lot, it gives a positive shock to the economy and stimulates growth. So, while the government is running a deficit, it can be quite good for the economy. However, as year after year of deficit goes on, a massive debt can accumulate. The government must pay off the interest of the debt. A significant percentage of many national budgets go to paying the interest on the debt. (If the government doesn't pay it, remember, interest builds.) When this interest payment grows too large, it can become a significant burden on the country as the government would have to significantly scale back funding of public welfare and infrastructure. When the government is running a surplus, that means the government needs to spend more. That spending can go to stimulate the economy or cut back the debt.

As with almost any other number in economics, there is a real deficit and a nominal deficit. The real deficit accounts for inflation and is smaller than nominal deficit. That is an important thing to remember: inflation wipes out debt. Over time, the amount of debt is worth less and less. Nominal deficit, of course, is just revenue - spending. The formula for finding real deficit is (real deficit) = (nominal deficit) - [(annual inflation) x (total debt)]. Sometimes, after the calculation, it turns out that with inflation accounted for, the government is actually running a surplus, not a deficit. The deficit must be measured as a ratio to the total GDP to determine its significance.