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Government Budget Options

Government Budget Options. Chapter 10. Government Budget. Revenue and spending plans outlined by the government can result in one of three situations: Deficit budget Surplus budget Balanced b udget. Deficit Budget.

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Government Budget Options

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  1. Government Budget Options Chapter 10

  2. Government Budget • Revenue and spending plans outlined by the government can result in one of three situations: • Deficit budget • Surplus budget • Balanced budget

  3. Deficit Budget • When government spends more than it collects in tax revenue. It must then borrow money to cover this shortfall.

  4. Surplus Budget • When the government collects more in tax revenue than it spends. There is money left over.

  5. Balanced Budget • When the government spends an equal amount to what it has collected in taxes.

  6. Annually Balanced Budget • Until the 1930’s the goal was to always have a balanced budget. • Government expenditures should not exceed the revenue brought in. • The market would work itself out – recessions would get worse because government would have to increase taxes during that time and or decrease the amount they will spend to meet the expenditures that year and in inflationary periods governments would increase its spending or decrease tax rates to balance the budget.

  7. Cyclically Balanced Budget • The Great Depression – stock market crash, loss of jobs, withdrawing money from banks resulted in some banks closing etc. • The government realized it needed to spend more money than it was taking in for revenue to get the economy back on its feet. • During inflation government will increase taxes and/or decrease its spending • During a recession government will decrease taxes and/or increase its spending

  8. Deficit and Surplus Budgets as Necessary • Deficit would be used when the economy needed a boost • Once the economy is doing better the surplus budgets will cut down on the debt incurred by the deficit budget. • Politics does not always allow for this – being re-elected = tax cuts, increase spending (even if the economy is doing well) • They will take the surplus budgets and turn them into deficits in hops of being re-elected.

  9. Full – Employment Budget • Governments should try to achieve a non-inflationary, full-employment level of output • They should only intervene in fiscal policy when the economy falls below full employment(unemployment 6-7%)

  10. Some Drawbacks and Limitations of Fiscal Policy • The time legs that exist in using fiscal policy are significant (ex. recognize the recession, decide on what to do, implement the plan, impact lag) • Government might have difficulty changing the spending and taxation policies • Conflict between various levels of government • Some regions could be doing well while others are not (blanket decision) • Size of debt can limit the use of fiscal policy as an effective tool • Debts impose a net burden on future generations

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