A government budget is a government document presenting the government’s proposed revenues and spending for a financial year. The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending.
A positive balance is called a government budget surplus, and a negative balance is a government budget deficit. A budget is prepared for each level of government (from national to local) and takes into account public social security obligations.
The meaning of “deficit” differs from that of “debt”, which is an accumulation of yearly deficits. Deficits occur when a government’s expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures.
The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments.
Before the invention of bonds, the deficit could only be financed with loans from private investors or other countries. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.
Large, long-term loans had a high element of risk for the lender and consequently gave high-interest rates. Governments later began to issue bonds that were payable to the bearer, rather than the original purchaser. This meant that someone who lent the state money could sell on the debt to someone else, reducing the risks involved and reducing the overall interest rates.
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital requirements are too large, a nation may default on its debts, usually to foreign creditors. Public debt or borrowing refers to the government borrowing from the public.
Government spending, inflation and lower revenue are among some of the main factors that point to fiscal deficit. The cynical nature of fiscal deficit does not only jeopardize the growth of the country but also the government’s economic management abilities.Another major reason for a growing fiscal deficit can be slow economic growth or sluggish economic activities.
Fiscal deficit has been a key concern for credit rating agencies and RBI is likely to be on alert when it pays its debt because paying high interests with cautious investors amid rising deficits might not be considered a smart move.
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence aggregate demand and the level of economic activity. The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables, amongst others, in an economy:
- Aggregate demand and the level of economic activity;
- The distribution of income;
- The pattern of resource allocation within the government sector and relative to the private sector.
Don’t Miss: Fiscal Policy
The three main stances of fiscal policy are:
- Neutral fiscal policy is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
- Expansionary fiscal policy involves government spending exceeding tax revenue and is usually undertaken during recessions.
- Contractionary fiscal policy occurs when government spending is lower than tax revenue and is usually undertaken to pay down government debt.
Fiscal policy refers to the use of taxation and government spending to influence economic activity. This is distinguished from monetary policy in that fiscal policy only deals with taxation and spending and is often administered by an executive under laws of a legislature, whereas monetary policy deals with the money supply, lending rates, and interest rates and is often administered by a central bank.