Budget Deficit - Economics Help

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 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:

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.

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

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