The budget compares revenue with spending
Definition
Balanced budget: when government revenue over a year equals government spending, so there is nothing to borrow and nothing left over.
Budget surplus: when revenue is greater than spending, so the government takes in more than it pays out.
Budget deficit: when spending is greater than revenue, so the government has to borrow the difference.
- The budget position is found by subtracting spending from revenue, so a positive answer is a surplus and a negative one a deficit.
- It is measured over a financial year, which in the UK runs from April to the following March.
- A deficit is the normal position for the UK, because spending has exceeded revenue in most years for decades.
- The size is usually quoted as a share of national income as well as in pounds, because that shows whether the economy can carry it.
The deficit is a flow, the debt a stock
Definition
National debt: the total amount the government owes, built up from all its past borrowing added together and not yet repaid.
- One year's deficit adds to the national debt, so the deficit is the yearly flow and the debt the stock it accumulates into.
- A deficit can therefore fall while the debt still rises, because the government is borrowing less each year but is still borrowing.
- UK net debt is close to the size of a full year's national income, which is why the interest bill on it is now a large item of spending.
- Interest on that debt has to be paid before anything else, which is why a large stock of debt limits what a government can choose to spend on.
Common Mistake
- Do not use deficit and debt as though they meant the same thing, because one is a single year's gap and the other the total owed.
- Do not conclude the debt is falling because the deficit is, since any deficit at all still adds to the total.
A deficit is not automatically a problem
- What the borrowing paid for matters, because money spent on infrastructure adds to future output while money spent on running costs does not.
- The size relative to the economy matters more than the headline figure, since a growing economy can carry a larger absolute debt.
- How long it lasts matters too, because borrowing through a recession is different from borrowing every year regardless of conditions.
- The cost of servicing it matters most of all, since low interest rates make a given debt far easier to carry than high ones do.
Note
- Judgement: a deficit is best judged by its purpose, its size relative to the economy and how long it persists, rather than by the headline number alone.
Governments target the budget over time
- Few governments aim to balance the budget every single year, because tax revenue falls automatically in a downturn just as spending on benefits rises.
- Aiming for balance across the whole economic cycle allows borrowing in bad years and repayment in good ones.
- That is why a rule about the budget is usually written in terms of several years rather than one.
Self review
- How is the budget position calculated?
- What is the difference between a budget deficit and a budget surplus?
- Explain the difference between the deficit and the national debt.
- If revenue is £700bn and spending is £760bn, what is the budget position?
- Give two reasons a budget deficit might not be a serious problem.
