The public deficit is an item that measures the economic situation of the State of a country, by means of the difference between income and expenses in a specific year and, normally it is expressed in terms of percentage of the gross domestic product (GDP) of that same year .
The difference between public deficit and debt is that the first is a flow variable and the second is a stock variable. In other words, the public deficit represents the difference between income and expenses in a specific year. Meanwhile, debt is the variable to which the deficit is added or subtracted. The result is the total public debt.
It is worth mentioning that the public deficit, being a difference, can be positive or negative. If expenses are greater than income, then the difference (income – expenses) will be negative. Conversely, if income is greater than expenses, the difference (income – expenses) will be positive. When the difference is negative, it is known as a public deficit. On the contrary, when the difference is positive it is known as the public surplus. Although it is true, that although with different names it is the same magnitude.
- See meaning of surplus
- See deficit meaning
Ways to finance the public deficit
To finance the public deficit in successive years, the State can act in three ways:
- Through taxes: it is what we know as fiscal policy , by raising taxes they can collect more, and the government corresponds.
- Issuance of money: it is a method that is no longer used in developed countries. It generates inflation and depreciates the national currency, preventing the proper functioning and development of the domestic economy.
- Issuance of public debt: The Treasury captures financing, issuing assets at different periods of time (bonds, bills, etc.), for which it must pay investors a certain yield. Said issuance must be authorized by law and respect the restrictions imposed on it in the General State Budgets. The greater the debt of a country and its financing needs, the more complicated it is for private companies to obtain it, since they compete with the State and must pay more than it, which makes their financing more expensive and makes them less competitive, is what We know as the crowding-out effect , a situation that displaces private debt from the market.
In the present case, the Treasury issues bonds and bills at different maturities (public debt issuance). Let’s imagine you issue € 1 billion today in the form of bonds with a 10-year maturity. Investors will receive a periodic interest rate for 10 years, in exchange for financing the State at that time, until maturity.
The accumulated "living" sum of Treasury issues to finance the public deficit is what we call Public Debt. Normally, it is also expressed as a percentage of GDP for that year.
For this reason, the public deficit can be -5.9%, and is compatible with a public debt that represents 99.3% of GDP, as we can see in Spain in the table below.
|Spain||Public deficit||Public debt|
|€ million||% GDP||€ million||% GDP|