A budget deficit occurs when expenditures exceed revenues—the government spends more than it collects. While federal and provincial governments can run deficits (borrowing to cover shortfalls), most provinces require municipalities to approve balanced operating budgets without deficits. This requirement forces municipalities to match spending with revenue, ensuring they live within their means. Municipalities can still borrow for capital projects (buildings, infrastructure) but must have balanced operating budgets for day-to-day services. The no-deficit rule provides fiscal discipline but can make it difficult for municipalities to maintain services during economic downturns when revenues decline but needs increase.