What is deficit? You often hear a word deficit on different channels. Deficit is a very popular term in the economic world. Even the word deficit is often used in television news. The easy meaning could be like deficit itself can be interpreted as a lack of cash in finance. We can say it means a deficit in the budget.
When does deficit occur?
What is deficit? Deficits usually occur in the state budget or corporate cash. However, deficits are nothing new in the country’s treasury. The occurrence of deficits is a typical problem that can be experienced by any country, and this has happened since thousands of years ago.
In the past, the state even owed moneylenders or wealthy merchants when they experienced a deficit to finance royal festivals, traditional ceremonies, wars, and disaster management.
How to cover up excess expenditures?
If a country experiences a deficit, it can be said that government spending is more than their income. To cover this shortfall, the government must maximize funding from state financial sources, both from within the country and abroad. Pakistan has experienced a deficit, which causes the government to borrow money from different banks or central bank to cover excess expenditure.
Deficits’ major reasons:
A deficit is indeed an adverse financial phenomenon. A budget deficit can cause a country to owe other parties debt to meet excessive expenditure. Of course the budget deficit does not occur without a reason. There are several important factors that cause a country to experience a deficit.
State Development’s projects
To increase and accelerate a country’s economic growth, the government must aggressively carry out development in various fields. The development projects include infrastructure development to support economic activities, they increase national defense, improve the education system, regional development, and programs to reduce poverty.
The development of the country certainly requires significant costs and is not uncommon to cause budget deficits. This is usually often found in developing countries that are still continuing to carry out development to advance their countries.
Weak Currency Exchange Rates cause deficits
As a developing country that is not yet independent and is still heavily involved in foreign debt, Pakistan’s currency is still unstable. This also applies to most developing countries that still cannot fund their national life independently.
Thus, the exchange rate of the Pakistani currency is strongly influenced by changes in foreign currencies. If there is a decline in the exchange rate, the impact felt by the country will be very large. For example, if there is a depreciation of the value of the rupees against the US dollar, it is certain that the amount of Pakistan’s debt to the United States will be even greater along with the weakening of the exchange rate.
Low Purchasing Power of the People
If the purchasing power of the people is low, then most likely the country will experience a deficit. Daily needs for goods and services such as fuel, food, electricity, transportation, and health and education facilities are very important for the community.
But if many of the people are unable to meet these needs, the state must subsidize those on low incomes. Subsidies for the poor must naturally be taken from the state budget, which can then lead to a deficit because of the large amount of funds that must be spent by the government for these subsidies.
Settlement of Inflation
One condition that can be very detrimental to the country’s finances is inflation. The country actually has its own price standards, which are set every year through the State Budget. But market conditions are so dynamic that prices will increase every year.
If there is an unexpected inflation, then government spending will be increasingly inflated and not in accordance with a predetermined budget. Like it or not, the government has to revise the monetary policies in country and spend huge costs to cover the excess costs incurred due to inflation.
Impact of Deficit for society
When a country experiences a budget deficit, the impact will be felt by the government and the people. In general, here are the effects that might occur after the deficit.
High Interest Rates
The deficit condition is a greater stake for the government. Because of the small amount of revenue, the government must increase capital to meet the needs of the community and the state. One of the methods adopted is to increase interest rates, so that the community will experience the impact.
Inflation and prices effects
When the country has a deficit, prices will tend to increase, causing inflation. Increasing the price of goods is indeed a solution that can solve the problem of the budget deficit. But this certainly can be detrimental to the community or the country itself.
Declining Community Consumption Ratio
As a result of inflation, people’s purchasing power will decrease because their real income decreases. If this happens, people will also be reluctant to save to the bank. Whereas public savings can encourage increased investment that can benefit the country. Indirectly, the budget deficit can cause a decrease in the level of investment.