The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Deficit Financing

  • George L. Perry
Reference work entry


Government budget deficits directly affect both the level of aggregate demand and its composition. Less directly, by influencing the amount of national saving and investment, they also influence the growth rate of real income in the longer run. The expected size and predictability of each of these effects is the subject of continuing empirical investigation. Because revenues and some transfer payments automatically rise and fall with cyclical movements in the economy, it is important at the outset to distinguish between actual deficits and structural deficits. The latter are calculated as the deficits that would prevail at some trend level of GNP, while actual deficits grow as the economy falls below this trend and shrink as the economy rises above it. In the rest of this discussion, deficits will mean structural deficits defined in this way, so that changes in the deficit refer to shifts in the deficit that would exist at a given utilization rate of economic resources.

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • George L. Perry
    • 1
  1. 1.