One of the terms that is heard the most about a country is that of the public deficit. This is not good if it is too high, because it will indicate that expenses exceed income in the country, which has negative consequences.
But what exactly is the public deficit? How is it measured? How does it affect us? If you've asked yourself all these questions, we're going to focus on this indicator that helps us understand whether a country's economy is doing well or if there are problems.
What is the public deficit
The simplest way to explain public deficit is with an example. Imagine a country starts spending more than it earns. For example, if it earns €1 million, its expenses are €2 million. This extra spending means it has debts and must pay those it owes money to, so it uses mechanisms to raise that money, either through loans or other means. But if spending remains high, it will never eliminate its deficit, and in the long run, the country becomes poorer and finds it increasingly difficult to obtain funds.
The opposite term would be the public surplus, which implies that income is higher than expenses, that is, that you have 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 2020 data, it reached 10,97% of GDP, which, compared to other countries, placed us 175th out of 190 countries that year.
What does that involve? Well, we are among the last positions in a problematic situation. We have gone from having a deficit of 35637 million to a deficit of 123072 million, which has been a huge increase, in part aggravated by the crisis of the pandemic.
Public deficit and public debt
Many people mistakenly believe that public deficit and public debt are the same thing, when in fact they are not. The key difference between the two lies in the fact that public deficit is considered a flow variable , while public debt is 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 to be able to meet the payment of the extra expenses that they have.
How it is calculated
When calculating the public deficit, three key indicators come into play : the country's income, its expenditures, and its GDP. All of these must be established for the same period, which is usually one year.
The formula would be the following:
Public deficit = income - expenses.
Now, why should GDP be taken into account? Because you can make a rule of three. If 100% would be GDP, the public deficit would be x% of GDP. For example, imagine that you have 1000000 GDP, and that your public deficit has been 100000.
By this rule of three, the public deficit would be 10% of GDP.
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 for your expenses. The problem is that this falls directly on the country's inhabitants, which implies 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 usual 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 the most. It is about putting government bonds and government bills on the market so that investors can buy them and, thus, obtain money to pay their debts. The problem is that if it gets bigger and bigger, in the end it is impossible to pay back the money that has been "borrowed".
Any of these methods can have negative consequences for sectors of the economy; For this reason, the decision must be taken in a very studied way so as not to harm more.
How the public deficit affects us
To understand the public deficit nothing better than an example. Imagine that you have a monthly salary of 1000 euros. And some expenses of 2000 euros. That implies that you owe 1000 euros, which you do not have, to insurance, food, etc. So what you do is ask a friend, a relative, those 1000 euros.
The following month, go back to the same thing, and you ask that person for another 1000 euros. That means you already owe him 2000, but what if there were also interest? It would be much more. If this continues, in the end you will owe him a huge amount of money that you will not be able to pay back because, if you continue doing the same, you will not reduce 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 more. You couldn't pay anyone either, you would have to change your lifestyle in order to survive, to a worse one, at least for a while.
That 's exactly 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 until it can no longer continue, and that's when they have to bail it out (or let it die).
Although there are many more factors and everything is not 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 as possible, to avoid problems and major consequences that will not be positive in any case.