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5.2.1 meaning of government budget

The government budget

Definition

Government budget: a financial plan setting out a government's planned spending and its expected revenue, mainly from taxation, over a period such as a year.

Two sides of the budget

  1. One side records government revenue, which comes mainly from taxation such as income tax and VAT.
  2. The other side records government spending on items such as public services, welfare and investment.
  3. The budget is the plan that brings these two sides together for the year ahead.
Key Idea
  • The budget is the central instrument of fiscal policy.
    • By choosing how much to tax and spend, a government also chooses how much to inject into or withdraw from the circular flow.

The budget balance

  1. The budget balance is government revenue − government spending over the period.
  2. A balanced budget occurs when revenue equals spending, so the balance is 0.
  3. A budget surplus occurs when revenue exceeds spending, and a budget deficit when spending exceeds revenue.
Example
  • Suppose a government plans revenue of £500 billion and spending of £550 billion.
Budget balance=revenue−spending \text{Budget balance} = \text{revenue} - \text{spending} Budget balance=revenue−spending
  • So 500 − 550 = −50: a budget deficit of £50 billion.
  • If revenue were £560 billion instead, 560 − 550 = +10: a budget surplus of £10 billion.

Why the budget matters

  1. The budget lets a government manage aggregate demand through fiscal policy.
  2. It funds public services and can redistribute income through taxes and transfers.
  3. A persistent deficit must be financed by borrowing, which adds to the national debt.
Exam technique
  • State the budget balance as revenue − spending before judging surplus or deficit.
    • A positive figure is a surplus and a negative figure is a deficit.
  • Name taxation as the main source of revenue rather than borrowing.
Common Mistake
  • Do not confuse the budget balance with the national debt.
    • The balance is a yearly flow, while the national debt is the stock of borrowing built up over many years.
Self review
  • What is a government budget?
  • What are the two sides of the budget?
  • How is the budget balance calculated?
  • If revenue is £400 billion and spending is £420 billion, is the budget in surplus or deficit, and by how much?
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A government budget is a financial plan showing the government's planned spending and expected revenue over a period, usually one year. It sets out how the government intends to raise and use money.

The budget is the central instrument of fiscal policy. By changing taxation and government spending, the government can influence economic activity and the distribution of income.

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What two financial items does a government budget set out?

5.2.1 meaning of government budget Revision Guide

  1. Intl A Level
  2. /Economics
  3. /5.2.1 meaning of government budget

Revision notes for CIE Intl A Level Economics 5.2.1 meaning of government budget: explanations and worked examples.

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