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Concept
Deficit spending
Summary
Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending was first identified as a necessary economic tool by John Maynard Keynes in the wake of the Great Depression. It is a central point of controversy in economics, as discussed below.
Government deficit spending is a central point of controversy in economics, with prominent economists holding differing views.
The mainstream economics position is that deficit spending is desirable and necessary as part of countercyclical fiscal policy, but that there should not be a structural deficit (i.e., permanent deficit): The government should run deficits during recessions to compensate for the shortfall in aggregate demand, but should run surpluses in boom times so that there is no net deficit over an economic cycle (i.e., only run cyclical deficits and not structural deficits). This is derived from Keynesian economics, and gained acceptance during the period between the Great Depression in the 1930s and post-WWII in the 1950s.
This position is attacked from both sides: Advocates of federal-level fiscal conservatism argue that deficit spending is always bad policy, while some post-Keynesian economists—particularly neo-chartalists or proponents of Modern Monetary Theory—argue that deficit spending is necessary for the issuance of new money, and not only for fiscal stimulus. According to most economists, during recessions, the government can stimulate the economy by intentionally running a deficit.
The deficit spending requested by John Maynard Keynes for overcoming crises is the monetary side of his economy theory. As investment equates to real saving, money assets that build up are equivalent to debt capacity.
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