The Disadvantages of Deficit Spending

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"Deficit spending" refers to spending more money than you bring in during a certain period. The term is often used in a political context, but the concept can apply to personal finances, businesses and nonprofit organizations, too. When an individual or organization engages in deficit spending, it can be a sign of budget mismanagement, improper planning or a lack of self-control. Deficit spending is often fueled by debt, which can carry distinct disadvantages for any household or organization.

Rising Costs

Spending money you don't have can effectively increase the cost of everything you buy, whether as an individual or an organization. Buying assets such as inventory for cash can allow a business to take advantage of cash discounts, for example, while using debt adds interest charges and fees on top of listed prices. Transferring one debt to another to maintain deficit spending can have a compounding effect, where interest accumulates on previous interest charges.

Emergencies

Deficit spending on an individual level can be referred to as "living hand to mouth," and the same holds true for organizations. Maintaining expenses higher than your income can prevent you from creating a savings fund to tap during emergencies.

Someone who continually spends more than he earns, for example, may be out of luck if his car breaks down and his credit cards are maxed out. A business that spends more than it earns may not be able to cover emergency inventory shortfalls with last-minute purchases and rushed shipping.

Organizations

At the organizational level, deficit spending can make an organization less attractive to lenders, investors, potential acquirers and the top talent in the industry. Deficit spending can skew financial ratios, such as the debt-to-assets and times-interest-earned ratios, making outsiders wary of investing in the company's stock, bonds or debt.

Government agencies with budget overruns can become targets for politicians looking to cut budgets and wasteful spending. Also, the disadvantages inherent in government deficit spending are passed on to citizens, who bear the burden for the additional costs.

Investment Opportunities

The fundamental purpose of investment is to increase assets, whether through a financial investment such as corporate bonds or capital investments such as new vehicles and machinery. The same problem that prevents deficit spenders from putting money aside for emergencies can also prevent them from making investments to move their financial situation forward. An individual may not be able to invest in a new home without being able to save up a down payment, and a business may not be able to upgrade its technology infrastructure to boost productivity.

References

About the Author

David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.

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