Deficit and Debt

Budget

The government creates a budget yearly that outlines their revenue and how they plan to spend money.
- Budget deficit: government spending > government revenue
- Budget surplus: government spending < government revenue
- Balanced budget: government spending = government revenue
A government budget deficit is paid for through borrowed money, which means the government takes on debt.
A budget surplus can be used to pay previous debts.

Government debt is the accumulation of government budget deficits
- Debts can become problematic, and the longer it takes to pay them, the more they cost due to interest payments.
- This is why it is important to be able to measure what amount of government debt is healthy to avoid accumulating too much debt.
To measure the sustainability of government debt, the debt-to-GDP ratio is used.
- Debt-to-GDP ratio = Debt/GDP
A higher ratio means it will be more difficult to pay off debts.
A recommended Debt to GDp ratio is 0.6, or 60%.
- Even this ratio is quite high, and many countries have much more than this ratio.

As debt-to-GDP ratio increases, more money must be paid to creditors to cover the interest.
Debt-servicing is the repayment of principal/interest on debt owed.

Countries have a credit rating similar to an individual's credit score.
The rating represents an assessment of how likely a government is able to repay its debt.
- Countries with lower scores are less likely to be able to borrow money, as the lender is uncertain as to if it'll be paid back.

A government that must pay its debts is unable to use that money to promote economic growth by spending on education, healthcare or infrastructure.

Some countries repay their debt back regularly, while others struggle to service their debts.
Factors that indicate the sustainability of debt:
- Political stability
- Composition of debt: loan duration, loan provider
- Vulnerability of economy: level of development, dominant sector (primary, secondary, tertiary, quaternary)