Budget Deficit
When government spending exceeds tax revenue in a given year, the gap must be financed by issuing new debt — adding to the national debt.
A budget deficit occurs when a government's expenditures exceed its revenues in a fiscal year. To fund the shortfall, the government issues bonds, increasing the national debt. Deficit spending can be stimulative in a downturn but adds to long-run debt service costs.
Large deficits increase bond supply, which can push yields higher if demand doesn't keep pace. Deficits financed during periods of full employment are particularly inflationary, complicating the central bank's task. Bond markets may demand a higher "term premium" to hold government debt from high-deficit issuers.
Related Terms
Bond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerFiscal Policy
Government spending and taxation decisions that expand or contract the economy, independent of the central bank's monetary levers.
BeginnerInflation
The rate at which the general price level of goods and services rises, eroding purchasing power over time.
BeginnerNational Debt
The total accumulated stock of government borrowing — the sum of all past budget deficits minus surpluses, financed through outstanding bonds.
IntermediateTreasury
U.S. government debt securities issued by the Department of the Treasury — the global benchmark for risk-free rates and the deepest bond market in the world.
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