Public deficit

The public deficit occurs when a State spends more than it enters in a period of time (normally a year). As a result of this extra expense you have to incur debt. The opposite of the public deficit is the public surplus.

Public deficit

The public deficit originates when a State is not able to raise enough money to meet its expenses. It is normally represented as a percentage of the State’s GDP, to make it easier to compare it with other States. For example, if a country spends € 1,000, enters € 800 and its GDP is € 10,000, the public deficit of the State is 2% with respect to GDP.

The result of the public budget is obtained by adding all the income of a State (for example taxes and benefits of public companies) and subtracting expenses (for example subsidies, public salaries and public works). The public deficit is the fiscal deficit that encompasses all the public administrations of a State.

Public deficit, fiscal deficit and budget deficit

When we speak of public deficit, we generally refer to the fiscal deficit of the set of public administrations of a State (sum of the fiscal deficits of the municipalities, provinces and central government). Despite this, it is sometimes also used to refer to the fiscal deficit of a public administration, such as an autonomous community, province or municipality.

Public administrations have the obligation to make a budget to know what their income and expenses will be in the next year. Therefore, they will know in advance if a State is going to have a public deficit or not. In this case it is known as a budget deficit, because it refers to the fiscal deficit foreseen by the Government when making the budgets for the following year.

Example of public deficit

Let’s see a simple example of how to calculate the public deficit of a fictitious country. Your data for year 20 are:

  • GDP = € 1000
  • Income = € 100
  • Expenses = € 153
  • Public deficit: – € 53
  • Public deficit (%): 5.3% of GDP

The country has spent 53 euros more than it entered. Therefore, its public deficit as a percentage of GDP is 5.3%. To calculate we only have to divide the public deficit (in absolute value) by the GDP.