In cases where a budget deficit is identified, current expenses exceed the amount of income received through standard operations. To correct a budget deficit, a nation may need to cut back on certain expenditures, increase revenue-generating activities or employ a combination of the two.Budget deficits, reflected as a percentage of Gross Domestic Product, may decrease in times of economic prosperity as increased tax revenue, lower unemployment rates and increased economic growth reduce the need for government-funded programs such as unemployment insurance and Head Start.
Strategies to Reduce Budget Deficits
Countries can counter budget deficits by promoting economic growth through fiscal policies such as reducing government spending and increasing taxes. For example, one strategy is to reduce regulations and lower corporate taxes to improve business confidence and increase treasury inflows from taxes. A nation can print additional currency to cover payments on debts issuing securities, such as Treasury bills and bonds, owe. While this provides a mechanism to make payments, it does carry the risk of devaluing the nation’s currency, which can lead to hyperinflation.