Twin Deficits Definition
In economics, a twin deficit occurs when a nation has both a current account deficit and a fiscal deficit. You can also call twin deficits a double deficit.
Current Account Deficit Definition
The current account is an account on the balance of payments. The current account records a nation’s net imports and exports. If imports exceed exports, then that nation has a current account deficit. If exports exceed imports, then that nation has a current account surplus.
Define Fiscal Deficit
Government budgets consist of the following:
- Monetary inflows from tax revenue and borrowing
- Monetary outflows from expenditures and interest payments
Governments borrow money by issuing bonds, and then pay interest on those issuances. A fiscal deficit occurs when government spending exceeds government revenues. Whereas a fiscal surplus occurs when government revenues exceed government spending. You can also call a fiscal deficit a budget deficit or a budgetary deficit.
Current Account Deficit – Fiscal Deficit
The twin deficit, or double deficit, occurs when a nation has both a current account deficit and a budget deficit. This means the country’s economy is importing more than it is exporting, and the country’s government is spending more money than it is generating. When a country has a double deficit, it is a debtor to the rest of the world. Over the long term, a double deficit may cause the nation’s currency to devalue.
Why Does the Double Deficit Matter?
The budgetary deficit represents a significant portion of federal spending that must be financed through the issuance of debt. This is generally not viewed as favorable as such debt increases the amount of high quality debt available for investors and negatively impacts the supply of funds for private borrowers, thereby raising the real interest rate for private loans. In addition, the future generations who will have to pay for such borrowings through increased tax collections will not enjoy the full benefit of the additional government spending today.
Imports Exceeding Exports
The current account deficit, or “trade deficit”, is the result of imports exceeding exports. This is generally financed by a net capital inflow into the country from abroad. Generally, many view such an imbalance as undesirable. This is because foreign goods produced by foreign workers meets the increasing consumer demand. It is to the detriment of the domestic workforce. In addition, it may go against public sentiment that an increasing amount of domestic assets, including federal government debts, are owned by foreign interests. A less politically correct view is that foreigners provide goods that are desired by consumers more cheaply than they can be produced domestically. Foreign lenders are willing to finance these purchases by accepting relatively low interest payments in return.
Ultimately, economists generally thought that running twin deficits concurrently for an extended period of time will result in a devaluation of the US dollar and higher domestic interest rates.