Government Budget Deficit

A budget deficit occurs when government spending is greater than tax revenues, Therefore the government has to make up the shortfall by borrowing from the private sector.

(N.B. Don’t get confuse the budget deficit with the Trade Deficit, this occurs when Imports are greater  than exports)

The National Debt       

This is the total (cumulative ) amount of debt that the government owes to the private sector at the moment this is over £850bn. It is measured by public sector debt statistics.

See: UK National debt for updated statistics

Chancellors Golden Rule:

            The UK chancellor has said that the govt will only borrow, over the
            course of the economic cycle, in order to finance sustainable investment

Cyclical Deficit:

During a recession it is likely that there will be an increase in govt borrowing. This is because:

This the level of the deficit even when the economy as at full employment, The govt wants to avoid this unless it is for suitable investment.

A criteria for joining the EMU that the govts budget deficit should be no more than 3% of GDP.

Relationship Between Output Gap and Government Borrowing

borrowing

 

Note: A negative output gap means output is less than potential. This indicates spare capacity. A large negative output gap suggests the economy is experiencing a recession. This usually causes a rise in government borrowing.

Note: Government deficits can be indirectly financed by Central Banks buying up bonds, in a policy of quantitative easing.

Related

 

Essays and Revision Notes on Fiscal Policy