A deficit appears when a budget's outgo exceeds its income over a set period, usually a year. Governments run deficits when tax revenue falls short of spending on schools, roads, defense, and social programs. Businesses run them when costs exceed sales. Households run them when they spend more than they earn, though we usually call that going into debt.

Government deficits are not automatically a crisis. During recessions, tax revenue drops and spending on unemployment benefits rises, so deficits widen. That is by design. Cutting spending during a downturn can make things worse. But persistent deficits during good times build up debt that must be serviced, crowding out other priorities.

Economists debate how much deficit is too much. Some argue that countries borrowing in their own currency can sustain larger deficits than others. Japan has run large deficits for years with low interest rates. Others warn that confidence can evaporate quickly. Once lenders doubt repayment, borrowing costs spike and a fiscal crisis follows.

Deficit drivers

• Recessions and falling tax revenue
• Tax cuts without spending reductions
• New spending programs
• Wars and emergencies
• Rising interest on existing debt