The Government Budget (CIE IGCSE Economics)

• The Government Budget (Fiscal policy) is presented each year as a balanced budget, a budget deficit, or a budget surplus
  • A balanced budget means that government revenue = government expenditure
  • A budget deficit means that government revenue < government expenditure
  • A budget surplus means that government revenue > government expenditure
    
    
• A budget deficit has to be financed through public sector borrowing
  • This borrowing gets added to the public debt
    
    

• Public expenditure (government spending) represents a significant portion of the total (aggregate) demand in many economies. The expenditure can be broken down into three categories
  
  

1. Current Expenditures: These include the daily payments required to run the government & public sector. E.g. The wages & salaries of public employees such as teachers, police, members of parliament, military personnel, judges, dentists etc. It also includes payments for goods/services such as medicines for government hospitals
   
   
2. Capital Expenditures: These are investments in infrastructure & capital equipment. E.g. High speed rail projects; new hospitals & schools; new aircraft carriers
   
   
3. Transfer payments: Payments made by the government for which no goods/services are exchanged. E.g. Unemployment benefits, disability payments, subsidies to producers & consumers etc. This type of government spending does not contribute to GDP as income is only transferred from one group of people to another
   
   

• Nearly every economy in the world is a mixed economy & has varying degrees of government intervention
• One of the main forms of government intervention is taxation & 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 & tax demerit goods to address this market failure
     
• Earn government revenue: governments need money to provide essential services, public & 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 & poor
   
• Support firms: in a global economy, governments choose to support key industries so as to help them remain competitive & taxation provides the funds to do this
   
• Support poorer households: poverty has multiple impacts on both the individual & the economy 
  • Intervention seeks to redistribute income (tax the rich and give to the poor) so as to reduce the impact of poverty