The Government Budget | Economics for GCSE/IGCSE - Year 11 PDF Download

Definition of the Government Budget

• The Government Budget (Fiscal policy) is presented annually in three forms: balanced budget, budget deficit, or budget surplus.
  • A balanced budget indicates that government revenue equals government expenditure.
  • A budget deficit occurs when government revenue is less than government expenditure.
  • A budget surplus happens when government revenue exceeds government expenditure.
• In the case of a budget deficit, the government needs to cover the shortfall through public sector borrowing, which then contributes to the public debt.

Reasons for Government Spending

Public expenditure is a crucial component of the overall demand in various economies, divided into three main categories.

• Current Expenditures: These encompass the day-to-day outlays necessary for the functioning of the government and public sector. For instance, this includes salaries of public servants like teachers, police officers, military personnel, judges, and healthcare professionals. It also covers expenses for goods and services such as medications for government hospitals.
• Capital Expenditures: These investments are directed towards infrastructure and capital assets. Examples include projects like high-speed railways, new healthcare and educational facilities, and the construction of naval vessels.
• Transfer Payments: These are disbursements made by the government where no goods or services are provided in return. This type of spending involves payments like unemployment benefits, disability assistance, and subsidies for both producers and consumers. Notably, transfer payments do not directly contribute to the GDP since they involve the redistribution of income rather than the creation of new value.

Reasons for Taxation

• Nearly every economy in the world is a mixed economy and has varying degrees of government intervention.
• One of the main forms of government intervention is taxation, and there are various reasons why it is deemed necessary.

Reasons for government taxation in mixed economic systems

• Correcting Market Failures
  • In various markets, resources are not optimally allocated, leading to inefficiencies from society's perspective.
  • The government intervenes by subsidizing merit goods and taxing demerit goods to rectify this market failure.
• Earning Government Revenue
  • Governments require funds to provide essential services, public goods, and merit goods, which are attained through taxation.
• Promoting Equity
  • Wealthy individuals are taxed to narrow the opportunity gap between the rich and the poor.
• Supporting Firms
  • In a global economy, governments choose to bolster key industries to enhance competitiveness, with taxation serving as the funding source.
• Assisting Impoverished Households
  • Poverty has diverse impacts on both individuals and the economy, prompting interventions aimed at income redistribution to alleviate poverty's effects.