What is a Budget Deficit? All You Need To Know…
A budget deficit is when you spend more than you have coming in.
Although for a short period of time most of us can get by with a budget deficit, they cannot be sustained over long periods.
They are also the primary reason why people end up with problem debt.
However, budget deficits are now becoming the norm in the UK, with the Office of National Statistics (ONS) reporting UK consumers are now spending more than they have coming in, which is the first time UK consumers have done so on average since the 1980s.
On average, the ONS found, in 2017, UK consumers spent more than £900 more than they had coming in.
What causes a budget deficit?
Budget deficits are caused by a number of factors, such as people losing their jobs, drops in income or ill health.
They can also be caused by, and exacerbated by, excessive borrowing, (which is a bit like pouring petrol onto a fire when it comes to a deficit budget), as not only does the borrowing mask the deficit, but also increases the level of expenditure the borrower is likely to have going forward, as borrowing generally increases monthly debt payments.
Another factor largely to blame for budget deficits is the rising costs of living, whilst income levels are not keeping up with inflation. This creates a gap between what people have coming in and what they have going out: a gap the ONS found people are filling with savings and debt.
How do you tackle a budget deficit?
To tackle budget deficits, people need to balance their household income and expenditure. This can be done in a number of ways. The most obvious way is to begin budgeting and to make sure you are not spending more than you need to.
This can often occur when people are used to a higher level of income, then lose their job or experience a drop in their income. When this happens it can take people a while to adjust to the new lifestyle that is forced on them.
However, people also cannot always make the changes to their lifestyle that they need to, because they are contracted into certain arrangements like mobile phone deals, or hire purchase agreements.
Income and Expenditure Plans
One practical way of dealing with this problem is to draft up an income and expenditure plan.
This is relatively simple process and there are numerous free templates online that can be downloaded or you can use our online budget calculator. Alternatively you can put all your income down on a blank piece of paper and then on another page, all your expenditure. You then take your expenditure away from your income. What is left is what is called your disposable income.
Where the figure left is a negative one (your expenditure exceeds your income) you have a budget deficit.
In such a case you have two choices.
First, ask yourself how you can increase your income (get a second job or see if there are additional benefits you are can get (see here)). Secondly, see what you can reduce in your expenditure.
Reducing your expenditure is not as simple as people think. It is not always possible to cut back. Your council tax is what it is, as is likely to be your mortgage or rent; and as mentioned earlier, often you may be contracted into agreements, which even if you wanted to, you cannot stop immediately without suffering further charges or penalties. Although it’s may be worth speaking with your providers, as they may be able to downgrade a package or remove features.
Where you are able to increase your income and/or reduce your expenditure, to such an extent you have a surplus each month, this is known as your disposable income. Ideally you should aim to have some disposable income, as this is money you can save or use to pay down debts quicker (and, therefore, in the long term, reduce your expenditure by reducing the payments you need to pay your debts each month).
When is it time to seek help?
However, where you can’t or cannot reduce your expenditure enough to allow you to continue to make the minimum payments to your debts, or allow you to repay them over a reasonable period of time (say 5-6 years), you probably need to seek specialist money advice.
Specialist money advice, such as that provided by Creditfix advisers, looks at what other options you may have for addressing your deficit budget, which may include using formal debt management and debt relief solutions such as the Debt Arrangement Scheme and Protected Trust Deeds in Scotland, or Individual Voluntary Arrangement in other part of the UK.
These solutions, when provided by reputable firms, can often make the difference and allow you to rebalance your household income and expenditure, which as all our grandparents knew, is the basis upon which all household budgets should be based.
To speak to a Creditfix adviser call 0808 2085 198