ABSTRACT
The state of balance of the federal budget reveals much about the management of public sector resources, 1 but budget deficits per se need not be the basis for an adverse conclusion. When an economy experiences an unexpected downswing, the government tries to ameliorate the impact by increasing spending beyond available receipts. It may need to run short-run deficits to finance the capacity-building activities that are often necessary to help sustain economic growth; the income from these investments will eventually help finance the deficits without burdening the economy unduly. A responsible government also accumulates budget surpluses during economic upswings to be drawn upon in times of need. However, persistent budget deficits that bear no relationship to the state of the economy are a cause for concern; they signal fiscal profligacy and could adversely affect the credit rating of the economy. Also, large deficits undermine the effectiveness of fiscal policy as a countercyclical tool.
