Budget Crisis

A budget crisis occurs when a government lacks the monetary resources it needs to function properly. More simply, a government spends more money on programs and services than it collects in revenue (i.e., taxes) and must borrow to cover the gap. The more a government borrows, the bigger its debt grows and the more difficult it becomes for the government to pay back what it owes. Such borrowing is unsustainable in the long term and poses a serious threat to the economy. A budget crisis may occur at any level of government and can have dramatic, widespread effects.

Overview

A governmental budget crisis occurs when a government's expenses are greater than its income from taxes and other revenue. To make up the difference, the government can reduce spending by eliminating certain programs or services, such as military spending or unemployment benefits, or raise taxes on citizens to generate additional income. However, representatives in government often are unwilling to take either of these actions because such measures are unpopular with voters. Instead, the government may choose to cover the difference by borrowing money, often from foreign countries.

Each year that the government fails to stay within its budget, it borrows more money to continue to pay for services and programs and falls further into debt. The US government, for example, has accrued $36.17 trillion in debt as of January 2025. Eventually, however, the government's debt will become so large that it will threaten the stability of the economy and the lifestyles of ordinary citizens.

Types of Budget Crises

Generally, all budget crises involve a mismatch between a government's income (not enough) and its expenses (too much). However, the causes of budget crises vary.

A budget crisis may result from disagreements between the executive and legislative branches of the government. For example, in the United States, the president (executive branch) drafts a budget and sends it to Congress—the legislative branch, which includes the House of Representatives and the Senate—each year. The House and the Senate modify the budget, and then the members of both houses vote on it. Once the revised budget passes in both houses, the president either signs it into law or vetoes it. Political differences between the president and Congress or between the House and the Senate can stall the budget-making process. The process generally works the same way for individual state governments, only the process occurs between the governor (executive branch) and state legislators (legislative branch).

Some budget crises arise from budget shortfalls. A budget shortfall occurs when expenses outpace income, but the option of borrowing to make up the difference is nonexistent. For example, state governments generally have to balance their budgets each year. If a budget shortfall exists, the state government must cut spending, raise taxes, or create new taxes to cover the difference. Often a combination of these measures is necessary.

A budget crisis may occur when the value of a country's currency decreases. Such crises, called currency crises or foreign exchange crises, often occur in developing countries with relatively new, fragile economies. In these countries, debt contracts are short term and often expressed in more stable foreign currencies. If the value of the country's currency drops, it can negatively impact the exchange rate of the currency, meaning that the currency no longer has the same purchasing power. Consequently, the amount owed on debt contracts quickly increases.

Effects of Budget Crises

Regardless of its causes, a budget crisis often has widespread effects. A government's failure to pass a budget can lead to a government shutdown. During a shutdown, many nonessential government services become unavailable. For example, in October 2013, the US government shut down for sixteen days after it failed to pass a budget due to political disagreements between Congress and President Barack Obama. Many government workers were furloughed, or forced to take time off without pay. National parks, monuments, and museums closed. Government-funded programs such as Head Start failed to receive funding. The longest government shutdown in US history occurred in the 2018–2019 fiscal year, when President Donald Trump and Congress could not agree on a budget due to a dispute over funding Trump's proposed border wall. The shutdown lasted for thirty-five days. Government shutdowns can result in job losses, economic damage, and billions in lost revenue.

Budget shortfalls generate negative effects, too. Any time a government has to cut spending, programs and services funded by the government suffer. For example, in 2012, the state of California failed to balance its budget and had a shortfall of $15.7 billion. As a result, California's governor introduced spending cuts and tax increases that covered the shortfall but were detrimental to citizens. For example, some state workers were furloughed; tuition at stated-funded colleges and universities increased; and funding for programs that supported education, health, and welfare was reduced.

A currency crisis also can have widespread negative effects. Due to the rapid rise in debt as a result of devalued currency, businesses may lose funding, banks may stop lending, and the economy may slow down drastically. A currency crisis can stall trade negotiations with other countries, which can impede global economic growth. Moreover, a currency crisis in one country can affect other countries in the same region. For example, from 1997 to 1998, several countries in Asia experienced currency crises. The crisis began when Thailand devalued its currency. This alarmed foreign investors, who began to examine other Asian economies more closely, and many withdrew their investments. Soon other countries in the region, such as Taiwan, Indonesia, and Malaysia, began to experience their own currency crises.

Bibliography

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