Question

How budget deficits and national debt are defined?

Is it a good policy for the government to create a budget deficit? Why and why not?

Answer 1

Budget deficit is the difference between all receipts and expenses in both revenue and capital account of the government. Budget deficit is usually expressed as a percentage of GDP. In simpler words national debt can be said as, the total amount of money which a country's government has borrowed. It is the net accumulation of the federal government's annual budget deficits.

Budget deficit can be both good and bad and this mainly depends on the economy business cycle. Good deficit can boost growth, while the bad one will hurt growth. Budget deficit during recession is a good thing as, deficit spending can promote higher growth, which will enable higher tax revenues and the deficit will fall. Hence creation of budget during recession can be said to be a good thing.