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What is the deficit?

A deficit is a shortfall or a gap between two things; in finance, a deficit means a lack of economic resources, especially money. A person has a deficit if they spend more money than they earn in a month. A government has a fiscal deficit if it spends more than what it gets from taxes and other sources. A country has a trade deficit if it buys more goods from other countries than what it sells to them. In short, a deficit happens when negative things are more than positive things.

Deficit Explained

A deficit means an entity spends more money than they are earning, which is not a good situation. To cover the gap, the entity has to borrow money from others, which makes it dependent on them. This is why deficits are considered harmful and risky for long-term economic health.

But sometimes, entities choose to have deficits for some future gain. For example, a government may spend more money to boost the economy and create jobs during a recession, even if it increases its fiscal deficit. The government hopes this will help the country recover from the recession soon.

The most common types of deficits are fiscal and trade deficits. There are also other types, such as current account deficit, capital account deficit, primary deficit, and budget deficit