Meaning of Deficit: Definition, Causes, and Impact of Deficit

What is meant by a deficit ? In general, the meaning of deficit is a financial situation in an organization or in the scope of the country, where expenditure is greater than income.

Another opinion says, the meaning of deficit is a state of financial shortages in cash as a result of spending that is greater than income. This situation is often experienced by many companies and also developing countries.

The state of deficit in a country can be covered by maximizing various sources of state finance , both from within the country and from abroad. In Indonesia, the state budget deficit had occurred that required the Indonesian government to borrow money from the Central Bank, namely Bank Indonesia to finance its various activities.

Also read: Understanding the State Budget

Factors That Cause Deficits

The state of deficit in a company or country does not just happen. There are several main factors that often cause the deficit.

Referring to the meaning of the deficit described above, as for several factors causing the deficit are as follows:

1. Development Financing

Often a developing country makes a large investment to finance development to improve the welfare of its people. The financing is to accelerate economic growth with various development programs, such as:

  • Infrastructure development.
  • Provision of defense and security facilities / infrastructure.
  • Development of court facilities and correctional institutions.
  • Development in the social field (education and health).
  • Regional transmigration and development program.
  • Program for handling and alleviating poverty (PPK and P3DT).

2. Low Purchasing Power

Deficits can also be caused by the low purchasing power of people for goods and services for daily needs. For example, food, education facilities, transportation, fuel, and electricity.

This situation then makes the government subsidize various needs so that low-income people can buy those needs. The provision of these subsidies eventually resulted in a state of deficit in the state treasury due to the amount of expenditure.

3. Weak Currency Exchange Rates

Indonesia is one of the countries that carry out foreign loans. Therefore, every time there is a change in the value of foreign currencies, especially the US dollar, Indonesia will be affected.

Loans from foreign currencies are calculated in foreign currencies, while debt payments are calculated in rupiah. When there is a depreciation of the rupiah, the foreign debt will increase.

4. Storage of Realization of the Plan

Every time the National Budget is prepared, the government has certainly made a plan for the source of state finances. However, it is not uncommon that the realization of state revenue does not reach the target so that many programs cannot be implemented.

Cost cutting is also often done on several programs because state revenue is not on target. This has resulted in the program not running optimally and every year the government must cover the shortfall so that it affects the preparation of the state budget.

5. Expenditures When Inflation

In preparing the APBN at the beginning of the year, the government used a predetermined price standard. However, prices can change and usually increase every year.

When there is unexpected inflation, the cost burden for various government programs will increase while the budget is set. As a result, the state budget has been revised and the government has to pay more.

Also read: Understanding Inflation

Impact of Deficits in General

The state of the deficit will have a negative impact on the sustainability of an organization as a whole. In accordance with the meaning of the deficit, as for some of the impacts caused by the deficit state are as follows:

1. Interest Rates

The state of the deficit can be characterized by a lack of expenditure due to less revenue. To meet the needs of the community, the government must increase capital. This results in interest rates will increase.

2. Inflation Rate

The state of the deficit can also be seen from the tendency of rising prices or inflation. This can happen when the government is spending on long-term programs that have not been produced.

In this case, people’s purchasing power may increase. However, the output produced is not in accordance with the demand causing inflation.

3. Consumption and Savings

The state of inflation due to budget deficits can reduce the real income of the community. This will then make people reduce their level of consumption and savings.

However, on the other hand saving has an important role to encourage investment. In other words, a budget deficit can result in a decrease in the level of investment.

4. Unemployment Rate

Still related to point 3, a decrease in the level of investment will have an impact on increasing unemployment. Rising interest rates and decreasing investment will stop many projects, resulting in a reduction in labor and increasing unemployment.

Also read: Fiscal Policy

How to Overcome Budget Deficits

The state of the deficit can be overcome by making various efforts, both in terms of revenue and expenditure. Some ways to overcome the deficit are as follows:

1. From the Reception Side

  • Making loans from banks, this will increase the amount of money circulating in the community and should be followed by an increase in the amount of goods produced.
  • To issue bonds, this will increase the absorption of public money and increase state revenue.
  • Borrowing from abroad, this is used to carry out productive and efficient projects where the installment payments are taken from taxes.
  • Increasing tax revenue, this will increase state revenue.

2. From the Expenditures Side

  • Reducing subsidies, the reduction in subsidies is done to reduce state spending that is too large, for example subsidies on fuel, electricity, and others.
  • Reduction of routine expenses, such as official travel expenses, meetings, seminars, electricity, and other routine expenses.
  • Prioritizing expenditure priorities, when the government deficit prioritizes programs that produce quickly. While long-term projects and with large costs will be postponed.
  • Cutting certain program costs, financing a number of government programs that do not encourage the growth of the real sector, taxes and foreign exchange must be reduced or cut.

 

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