The Government Budget (Cambridge International IGCSE Economics)

Key government budget terms

Spec point — "definitions of: – government budget – government budget deficit – government budget surplus • calculations of the size of a government budget deficit/surplus"

Key government budget terms

• Government budget

  • A statement of the government’s planned revenue (mainly from taxation) and expenditure (spending) over a specific period, usually one year
  • Shows the government’s fiscal policy intentions

• Government budget deficit

  • Occurs when government expenditure exceeds government revenue in a given period

  • Indicates that the government must borrow to finance the shortfall

    • For example*, *UK public sector net borrowing in 2023/24 was around £120 billion

• Government budget surplus

  • Occurs when government revenue exceeds government expenditure in a given period.

    • May be used to repay debt or saved for future spending

      • For example,* *Norway often runs budget surpluses due to high oil revenues

• Fiscal policy

  • The use of government spending and taxation to influence the economy

  • It can be:

    • Expansionary – increasing spending or reducing taxes to stimulate growth
    • Contractionary – reducing spending or increasing taxes to slow inflation

Calculating the surplus or deficit

• The budget balance is calculated using the following formula:

$\mathrm{Budget} \mathrm{balance}=\mathrm{Government} \mathrm{revenue}-\mathrm{Government} \mathrm{expenditure}$

• If budget balance > 0 → surplus
• If budget balance < 0 → deficit

Worked Example

• Government revenue = $800 billion
• Government expenditure = $900 billion

Calculate the budget balance and determine if it in surplus or deficit

Step 1: Substitute the values into the formula

\text{Budget} balance=\ 800 \mathrm{b} – $ 900 \mathrm{b}$

Step 2: Calculate the answer and state if it is a surplus or deficit

equationequals space – $ 100 space billion equals space deficit

Reasons for government spending

Spec point — 4.2.2 · main areas of government spending and the reasons for and effects of spending in these areas

• Public expenditure (government spending) represents a significant portion of the total (aggregate) demand in many economies
• Spending happens for the following reasons:

1. Provision of public goods

• Goods that the market would not supply effectively due to the free rider problem

  • E.g*.* national defence, street lighting, flood barriers

2. Provision of merit goods

• Goods/services that would be under-consumed without government intervention

  • E.g. education, healthcare, vaccination programmes

3. Welfare and social protection

• Direct financial support to vulnerable groups to improve living standards

  • E.g. unemployment benefits, pensions, disability support

4. Infrastructure investment

• Building and maintaining transport, energy, water and digital networks
• Supports business activity and long-term productivity growth

5. Debt interest payments

• Servicing existing government borrowing
• Prevents default and maintains credibility in financial markets

6. Environmental protection projects

• Funding for conservation, pollution control, and climate change adaptation

Reasons for taxation

Spec point — "reasons for taxation: raising revenue, discouraging consumption of demerit goods, reducing imports, redistributing income, influencing total demand, encouraging environmental sustainability"

Reasons for taxation

• Nearly every economy in the world is a mixed economy and has varying degrees of government intervention
• One of the main forms of government intervention is taxation and there are many reasons why it is necessary

A diagram showing several reasons for government taxation in mixed economic systems

• Correct market failure

  • In many markets there is a less than optimal allocation of resources from society's point of view

    • The government aims to subsidise merit goods and tax demerit goods to address this market failure

• Earn government revenue

  • Governments need money to provide essential services and public and merit goods

    • Revenue to fund this is raised through taxation

• Promote equity

  • The wealthy are taxed to provide funds that can be utilised in reducing the opportunity gap between the rich and poor

• Support firms

  • In a global economy, governments choose to support key industries so as to help them remain competitive and taxation provides the funds to do this

• Support poorer households

  • Poverty has multiple impacts on both the individual and the economy

    • Intervention seeks to redistribute income (tax the rich and give to the poor) so as to reduce the impact of poverty