Fiscal Policy: Government Budget Deficits and Surpluses

Introduction

Fiscal policy refers to the government's use of spending and taxation to influence the economy. A key aspect of fiscal policy is the government budget, which shows the difference between government revenue (mainly from taxes) and government expenditure.

A budget deficit occurs when government expenditure exceeds government revenue. Conversely, a budget surplus occurs when government revenue exceeds government expenditure.

This section will focus on calculating the size of a government budget deficit or surplus.

Calculating Budget Deficit/Surplus

The budget deficit or surplus is calculated as follows:

Budget Deficit = Total Government Expenditure - Total Government Revenue

Budget Surplus = Total Government Revenue - Total Government Expenditure

Data Required for Calculations

To calculate the budget deficit or surplus, you will need the following data:

• Total Government Expenditure
• Total Government Revenue (primarily from taxes)

Example Calculation

Consider the following data for a hypothetical country:

• Total Government Expenditure = $1,000 billion
• Total Government Revenue = $800 billion

Using the formulas above:

Budget Deficit = $1,000 billion - $800 billion = $200 billion

In this case, the country has a budget deficit of $200 billion.

Table Summary of Calculations

Item	Description
Budget Deficit/Surplus	The difference between total government expenditure and total government revenue.
Formula	Budget Deficit = Expenditure - Revenue Budget Surplus = Revenue - Expenditure
Data Required	Total Government Expenditure, Total Government Revenue

Important Considerations

It's important to note that:

• Budget deficits can lead to increased government borrowing.
• Large and sustained budget deficits can have negative long-term consequences for the economy.
• Government revenue can be affected by economic growth, tax policies, and other factors.
• Government expenditure can be influenced by various factors such as social welfare programs, infrastructure projects, and defense spending.

Practice Questions

1. If a government has total expenditure of $1,200 billion and total revenue of $900 billion, what is the size of the budget deficit or surplus?
2. Explain the difference between a budget deficit and a budget surplus.