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What Really is The Public Deficit?

What is The Public Deficit?

The easiest way to explain the public deficit is with an example. Imagine that a country begins to spend more than it earns. For example, if you enter 1 million euros, your expenses are 2 million. This extra expense implies that you have debts , and you have to pay those you owe the money, so you use tools to raise that money, either with loans or other formulas.

But, if spending continues to be high, it will never be able to end its deficit and, in the long run, the country will become poorer and it will become increasingly difficult for it to get money.

The opposite term would be the public surplus, which implies that income is higher than expenses, that is, that there is plenty of money to spend or invest. The truth is that it is not easy to find examples of this, but there are countries that have a very low public deficit.

The public deficit in Spain

In the case of Spain, the public deficit is quite high. According to data from 2020, 10.97% of GDP was reached, which, comparing it with that of other countries, in that year we are in position 175 out of 190 countries.

What does that involve? Well, we are in the last places in a problematic situation. We have gone from having a deficit of 35,637 million to one of 123,072 million, which has been an enormous increase, partly aggravated by the pandemic crisis.

Public deficit and public debt

Many are mistaken in thinking that the public deficit and public debt are the same, when in reality they are not. The big difference between both terms is that the public deficit is considered a flow variable , while the public debt would be a stock variable.

What does this imply? Well, the public deficit is the difference between income and expenses in a given period of time; while the public debt would be the accumulated sum that is made to finance the public deficit. In other words, it is what is owed to others who have lent us in order to be able to pay the extra expenses we have.

How to finance it

A country has methods to finance its public deficit. Among them are:

To raise the taxes . Your goal is to raise more money to pay your expenses. The problem is that this falls directly on the country’s inhabitants, which means that they lose more money and their quality of life suffers. For this reason, many decide to leave the country.

Issue more money. This is not common because it would imply that there is a depreciation of the currency, and it is negative, but it is a method used in less developed countries.

Issue public debt. It is what is done most. It is about bringing state bonds and state bills to the market so that investors can buy them and, thus, obtain money to pay the debts they have. The problem is that, if it increases, in the end it is impossible to return the money that has been “borrowed.”

Any of these methods can have negative consequences for the sectors of the economy; Therefore, the decision must be made in a very studied manner so as not to cause further harm.

How the public deficit affects us

To understand the public deficit, there is nothing better than an example. Imagine that you have a monthly salary of 1000 euros. And expenses of 2000 euros. This implies that you owe 1000 euros, which you do not have, for insurance, food, etc. So, what you do is ask a friend, a family member, for those 1000 euros.

The following month, do the same thing again, and ask that person again for another 1000 euros. That means you already owe him 2,000, but what if there was interest too? It would be much more. If this continues like this, in the end you will owe a huge amount of money that you will not be able to return because, if you continue doing the same thing, you will not reduce your expenses, and if you do not seek more income, you will never finish paying the debt.

What would it entail? Well, there would be a time when that person would no longer pay you. You couldn’t pay anyone either, you would have to change your lifestyle to survive, to a worse one, at least for a while.

Well , that is what happens in countries when their public deficit is so high; People’s quality of life suffers and the country becomes more and more indebted, reaching a point when it cannot continue, and that is when they have to rescue it (or let it die).

Although there are many more factors and not everything is so drastic, you do have a first approximation of what the public deficit is and what it means for a country to have it very high. Therefore, one of the objectives of the State must be to reduce it as much as possible, and as quickly, to avoid problems and major consequences that will not be positive in any case.