Economy

deficit spending unit

What is a deficit spending unit?

A deficit spending unit is an economic term used to describe how an economy, or an economic group within that economy, spends more than it earns over a specified measurement period. Both companies and governments can have deficit spending units.

key takeaways

  • Deficit spending units describe how an economy or an economic unit within an economy spends more than it earns in a given measurement period.
  • The opposite of a deficit spending unit is a surplus spending unit, which leaves money for the company to reallocate.
  • The term deficit spending unit applies not only to companies but also to households.

Understanding Deficit Spending Units

Deficit spenders can be individuals, sectors, countries, or even entire economies. When the deficit spending unit is the entire country, it is usually forced to borrow from the country operating as a surplus spending country. If left unchecked, the impact of deficit spending could pose a threat to economic growth. It could force the government to raise taxes and potentially default on debt. When an entity spends more than they earn, they may sell debt to raise funds. Governments sell Treasury bills and other instruments, while companies may sell equity or other assets.

During difficult economic times, governments and municipalities may run deficits to protect the effects of recessions and stimulate economic growth. While it is doubtful whether an economic unit will always be in surplus, with debt levels too high, chronic deficits can eventually lead to prolonged economic distress.

According to Keynesian economists, multiplier theory suggests that a dollar of government spending can increase total economic output by more than a dollar. From an economics point of view, the multiplier assumes that changes will have ripple effects on the rest of the economy.

Keynesians believe that as the government spends, it leads to an increase in the income of the population.

In the United States, households sometimes represent deficit spending units because these households are struggling financially and have no disposable income. As a result, they may not be able to buy additional consumer goods, hold money in banks, or invest in the stock market without government (or private) help.

The opposite of a deficit spending unit is a surplus spending unit, spending in excess of its basic needs. Therefore, it has surplus funds to invest in the economy in the form of purchases of goods, investments or loans. A surplus spending unit can be a household, business, or any other entity that earns more than it spends to maintain itself.

An example of a deficit spending unit is Illinois. The state’s general fund budget deficit for fiscal year 2020, which ends on February 8, 2019, is expected to be about $3.2 billion, about 16 percent higher than the official estimate at the end of 2018, according to the governor’s office.

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