Fiscal Deficits & Surpluses (Edexcel IGCSE Economics)
Introduction to Budget Deficits & Surpluses
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2.1.2a
Introduction to Budget Deficits and Surpluses
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The Government Budget (fiscal policy) is presented each year as either a balanced budget, a budget deficit, or a budget surplus
- A balanced fiscal budget means that government revenue = government expenditure
- A budget fiscal deficit means that government revenue < government expenditure
- A budget fiscal surplus means that government revenue > government expenditure
Graph: UK Budget for 2023/24
UK Budget for 2023/24
Source: OBR
Graph analysis
- Projected expenditure (e.g. on public services, state pensions and debt interest) is expected to be £1,189 billion
- The projected revenue from taxes and other sources is expected to amount to £1,058 billion
- As government revenue < government expenditure, there will be a budget deficit of £132bn in the fiscal year 2023/24
Impact of a Fiscal Deficit
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2.1.2a
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A budget fiscal deficit means that government revenue < government expenditure
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A fiscal deficit has to be financed through public sector borrowing
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Public sector borrowing occurs when the government borrows money either from domestic households and firms or from foreigners and foreign governments in order to fund their spending
- This borrowing gets added to the public or national debt
- Rises in the national debt cause an opportunity cost and possible crowding-out effects
The Impact of Fiscal Deficit
| Impact | Explanation |
|---|---|
| National debt | - National debt rises as the government spends more than it receives - This money has to be paid back with interest - There is a burden on future generations, as they are left with large interest payments on debt to pay off, usually through higher taxes |
| Opportunity cost | - Repaying debt creates an opportunity cost as future governments may have to cut spending on services or capital expenditures |
| Crowding out | - When the government borrows to cover its deficit, it drives up interest rates - Private consumers and businesses reduce borrowing as loans becomes more expensive - This leads to the crowding out of private sector investment, reducing spending and economic growth rates |
Impact of a Fiscal Surplus
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2.1.2a
Impact of a Fiscal Surplus
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A budget fiscal surplus means that government revenue > government expenditure
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A fiscal surplus can be used to fund capital expenditure on infrastructure, creating long-term economic growth
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It can be used to pay back government debt and reduce future costs of servicing debt
- A surplus can be set aside for future economic shocks, such as the Covid 19 crisis
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However, a surplus may cause economic growth to slow down unnecessarily as the government withdraws (higher taxes) more money than it injects(less spending) into the circular flow of income
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A surplus could be deliberate to moderate economic growth and therefore reduce pressure on prices (inflation)
Worked Example In an economy, the government has the following data available for 2024:
Category $bn Income tax revenue 4.85 Capital spending 3.26 Corporation tax revenue 3.76 Current spending 5.48 Fuel duty 0.62 Calculate the government's budget balance for 2024.
Step 1: Add together all income items
Income: 4.85 + 3.76 + 0.62 = $9.23bn
Step 2: Add together all expenditure items
Expenditure: 3.26 + 5.48 = $8.74bn
Step 3: Calculate the budget balance
Budget balance = $9.23bn - $8.74bn
= $0.49bn surplus
Exam Hint An exam question may require you to consider the cause of the fiscal deficit or fiscal surplus, as well as the consequence of each. E.g. You may need to consider whether the cause of a deficit, such as bailing out banks during the financial crisis, or spending on health care during the global pandemic, has long term impacts on future growth rates. This is because the extra government borrowing may lead to the crowding out of private consumer and business borrowing, thereby reducing economic activity levels.
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