Deficit

A deficit is a gap between the money coming in and the money being spent. Anyone who earns 100 euros in a year and spends 120 euros has a deficit of 20 euros. The opposite is called a surplus: then something is left over at the end. The word comes from Latin and roughly means “it is lacking”. What always matters is the time period, usually a year or a quarter, meaning a three-month period. A deficit must be covered somehow, usually through borrowed money or through savings.

Why a shortfall in the budget has consequences

A deficit does not disappear at the end of the year. It has to be financed, and this almost always happens through loans. Loans cost interest, meaning an additional amount that has to be paid for the borrowed money. Anyone who runs a deficit every year therefore builds up a mountain of debt that keeps growing on its own.

For states, this becomes a political issue. In the European Union, the rule is that a state’s annual deficit should normally be below three percent of its total economic output. This limit is set out in the European treaties and is regularly debated because it is difficult to comply with during crises. During the coronavirus pandemic, it was significantly exceeded in many countries.

However, a deficit is not automatically bad. If a country uses borrowed money to build schools, railway lines or power grids, this can pay off in the long run. It becomes critical when ongoing running costs are permanently paid for on credit. Economists have been arguing for decades about exactly where this line should be drawn.

How revenues, expenditures and debt relate to one another

The calculation itself is simple: revenues minus expenditures. For a state, revenues are mainly taxes and levies. Expenditures include salaries, pensions, investments and interest on old debt. If the result is negative, this is called a deficit.

Deficit and debt should not be confused. The deficit is the shortfall of a single year, a flow. Debt is the sum of all past deficits, a stock. A comparison: the deficit is the water flowing into a tub per minute, the debt is the water level in the tub. If the deficit falls, the mountain of debt grows more slowly, but it does not shrink.

In practice, a more precise version is often calculated. The primary deficit leaves out interest payments and shows whether the budget would work without old burdens. In addition, experts usually convert deficits into a percentage of economic output. This makes it possible to compare large and small countries, because 50 billion euros means something different for Germany than for Portugal.

Deficits in the news, balance sheets and AI companies

In the news, the term is most often encountered in politics. There, it concerns the federal budget, gaps in financial planning and the question of which expenditures should be cut. Cities and health insurance funds also report deficits. A related term is new borrowing, which describes the same thing from the credit side.

For companies, people tend to speak of a loss, but the same idea is meant. This is particularly visible at technology companies and AI providers. Many of them spend more money on data centers, graphics chips and personnel for years than they take in. They finance this shortfall with money from investors who hope for later profits.

A typical misconception is to confuse a deficit with a lack of money in the bank account. A company can have billions in its account and still report a deficit because it spends more than it earns. Conversely, a business can be calculated as profitable on paper and still run into payment difficulties. That is why, when reading the news, it is always worth asking which time period is meant and exactly what has gone into the calculation.