Fiscal Policy -The government budget
According to Encyclopaedia Britannica
government budget, forecast by a government of its expenditures and revenues for a specific period of time.
In national finance, the period covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond with the calendar year.
As mentioned above, the government budget has two aspects, the revenue and the expenditure.
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Let’s discuss these aspects in detail.
The main sources of government revenue are:
Taxes: These taxes comprise of both direct and indirect taxes. Taxes for a major source of government revenue. The chart below shows a source of government revenue for UK. Most of the nations have similar pattern of revenue sources.
Sale of goods and services: Many governments owned business earn substantial amount of revenue for the government. This can be another major source of revenue for the government.
Sale of state owned enterprises: Government might also earn revenue by selling state owned businesses to private sector. This is particularly seen in countries where a lot of privatisation is taking place. This is not a regular source of government’s revenue and differs substantially among countries.
Government expenditure is the total amount spent by the government in the economy. It can be classified as
Capital expenditure is the government spending on acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending.
Current expenditure is the expenditure of the government which does not result in the creation of assets or reduction in the value of its liabilities. Such expenditures are incurred for the normal running of government departments and maintenance of services.
Transfer payments is the financial assistance given to sections of the society in order to uplift or maintain their standard of living.Governments use such payments as means of income redistribution by giving out money under social welfare programs such as social security, old age or disability pensions, student grants, unemployment compensation, etc.
Given below is government expenditure for UK. Most of the countries have similar pattern of government expenditure. However, there might be different patterns based on priorities and policies and the political ideology of the government.
Budgets can have deficits or surplus. In a budget having more government spending than its revenue is termed as a deficit budget. Whereas, a budget with more government revenue than its expenditure is termed as a surplus budget.
Government budget deficits can be cured by cutting spending, raising taxes or a combination of the two. Deficits must be financed by borrowing money. Interest must be paid on borrowed funds, which worsens the deficit.
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