The Government Budget (Cambridge (CIE) IGCSE Economics): Revision Note

Key government budget terms

• Government budget

  • A statement of the government’s planned revenue (mainly from taxation) and expenditure (spending) over a specific period, usually one year

  • Shows the government’s fiscal policy intentions

• Government budget deficit

  • Occurs when government expenditure exceeds government revenue in a given period

  • Indicates that the government must borrow to finance the shortfall

    • For example, UK public sector net borrowing in 2023/24 was around £120 billion

• Government budget surplus

  • Occurs when government revenue exceeds government expenditure in a given period.

    • May be used to repay debt or saved for future spending

      • For example, Norway often runs budget surpluses due to high oil revenues

• Fiscal policy

  • The use of government spending and taxation to influence the economy

  • It can be:

    • Expansionary – increasing spending or reducing taxes to stimulate growth

    • Contractionary – reducing spending or increasing taxes to slow inflation

Calculating the surplus or deficit

• The budget balance is calculated using the following formula:

• If budget balance > 0 → surplus

• If budget balance < 0 → deficit

Reasons for government spending

• Public expenditure (government spending) represents a significant portion of the total (aggregate) demand in many economies

• Spending happens for the following reasons:

1. Provision of public goods

• Goods that the market would not supply effectively due to the free rider problem

  • E.g. national defence, street lighting, flood barriers

2. Provision of merit goods

• Goods/services that would be under-consumed without government intervention

  • E.g. education, healthcare, vaccination programmes

3. Welfare and social protection

• Direct financial support to vulnerable groups to improve living standards

  • E.g. unemployment benefits, pensions, disability support

4. Infrastructure investment

• Building and maintaining transport, energy, water and digital networks

• Supports business activity and long-term productivity growth

5. Debt interest payments

• Servicing existing government borrowing

• Prevents default and maintains credibility in financial markets

6. Environmental protection projects

• Funding for conservation, pollution control, and climate change adaptation

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 many reasons why it is necessary

• Correct market failure

  • In many markets there is a less than optimal allocation of resources from society's point of view

    • The government aims to subsidise merit goods and tax demerit goods to address this market failure 

• Earn government revenue

  • Governments need money to provide essential services and public and merit goods

    • Revenue to fund this is raised through taxation

• Promote equity

  • The wealthy are taxed to provide funds that can be utilised in reducing the opportunity gap between the rich and poor 

• Support firms

  • In a global economy, governments choose to support key industries so as to help them remain competitive and taxation provides the funds to do this 

• Support poorer households

  • Poverty has multiple impacts on both the individual and the economy 

    • Intervention seeks to redistribute income (tax the rich and give to the poor) so as to reduce the impact of poverty