A budget deficit is when spending exceeds income.

When public savings are negative, the

government is said to be running a budget deficit. To spend more than tax revenues allow,
governments borrow money and run budget deficits, which are financed by borrowing. For
Example with the Zimbabwean government, a majority of revenue comes from income taxes,
corporate taxes, consumption taxes, and social insurance taxes. On the other hand expenses
include government spending on healthcare, infrastructure, defense, subsidies, pensions, and
other items that contribute to the health of the overall economy.

Contrary to what it may sound like, a budget deficit is not always a negative indicator of
economic health. Some of the implications of a budget deficit are an Increase aggregate
demand. A budget deficit implies lower taxes and increased Government spending (G), this will
increase AD and this may cause higher real GDP and inflation. For example, in 2009, the
Zimbabwean government lowered VAT in an effort to boost consumer spending, hit by the
great recession.

More so during a recession, the economy tends to experience a decrease in investment

spending from the private sector, along with lower aggregate consumption and demand. A
government may choose to borrow and run a deficit to combat the situation by taking
measures to spend effectively.

A deficit can lead to a possible increase in public spending, how so? A government may run a
budget deficit to finance infrastructure investment. This could include building new roads,
railways, and more housing and improved telecommunications. This public sector investment
can help increase long-run productive capacity and enable a higher rate of economic growth. If
growth does improve, then the borrowing can pay for itself. For example, many public sector
investment projects can have a rate of return higher than the cost of borrowing

On the other hand running a country on a deficit will Increase the public sector debt. The
government will have to borrow from the private sector. In Zimbabwe, the Reserve Bank sells
bonds and gilts to the private sector. The public sector debt is the total amount of debt owed
by the government. This in turn has its own negative implications, likely higher debt interest
payments. When the government borrows, it offers to pay an interest payment to those who
buy the bonds. The interest rate attracts investors to lend the government money.