What Is a Deficit Spending Unit?
Let me explain what a deficit spending unit is—it's an economic term that describes how an economy, or a specific group within that economy, ends up spending more than it earns over a particular period. You see this with both companies and governments facing such situations.
Key Takeaways
- A deficit spending unit means an economy or unit within it has spent more than earned in a given period.
- The opposite is a surplus spending unit, which has leftover money to redistribute.
- This term applies to corporations, households, and more.
Understanding Deficit Spending Units
Deficit spenders include individuals, sectors, countries, or even the entire economy. If a whole country is a deficit spending unit, it often has to borrow from surplus-running countries. If you let deficit spending go unchecked, it poses a real threat to economic growth—it can force governments to hike taxes or even default on debt. When something spends more than it brings in, it might sell debt to raise funds; governments issue Treasury notes and similar instruments, while companies could sell equity or assets.
In tough economic times, governments and local authorities commonly run deficits to buffer against recessions and boost growth. It's unlikely any economic unit will always run a surplus, but a long-term deficit will eventually create hardships as debt piles up too high.
Keynesian economists point to the multiplier theory, where a dollar of government spending can boost total economic output by more than a dollar. This multiplier creates a ripple effect across other economic sectors. Keynesians argue that government spending increases the population's income, leading to broader economic benefits.
Deficits in U.S. Households and Surplus Units
In the U.S., households can act as deficit spending units when they're struggling financially without disposable income. This means they can't buy extra consumer goods, save in banks, or invest in stocks without help from the government or private sources.
On the flip side, a surplus spending unit earns more than it spends on basics, leaving money for investing in the economy—through buying goods, investing, or lending. This could be a household, business, or any entity that generates more than it needs to sustain itself.
An Example of a Deficit Spending Unit
Take the state of Illinois as an example—according to the governor's office, its general funds budget deficit for fiscal year 2020 was projected at about $3.2 billion as of February 8, 2019, which is around 16% higher than the official estimate from the end of 2018.
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