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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)
- PSNCR Public Sector Net Cash Requirement:
This is the official title for the government borrowing
(N.B. this used to be called the PSBR)
- PSNB Public Sector Net borrowing
The National Debt:
This is the total (cumulative ) amount of debt that the government
owes the private sector at the moment this is over £300bn, annual interest payments on the debt are close to £23bn
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:
- Tax revenues will be lower.
- less people are working therefore income tax will be less
- Consumer spending is lower therefore VAT receipts are lower
- Government spending will increase
- More will be spent on unemployment benefits
- To increase AD fiscal policy requires higher spending and lower taxes
- A cyclical deficit is not necessarily a bad thing during a recession. If the government tried to balance the budget in a recession this would involve higher taxes and less spending reducing AD further.
- Structural deficit:
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.
- Growth and Stability Pact:
A criteria for joining the EMU that the govts budget deficit should be no more than 3% of GDP.
Essays and Revision Notes on Fiscal Policy
Problems of Government Borrowing in the UK
How Government finances national debt
WHat does Government Spend its Money On