2.4 Fiscal Policy – The Government Budget

Sources of government revenue:

  • Taxes:
    • Direct taxes, such as income tax or corporate taxes
    • Indirect taxes, for example – VAT
  • Profit from state-owned enterprises which sell goods and/or services. For example, public transportation in some countries is nationalised. Hence, the earnings go to the government budget. (However, a lot of state-owned firms could be (and usually are) very inefficient. Therefore, government might actually need to draw from the government budget to keep those firms running.)
  • Selling (privatising) state-owned enterprises. Government budget increases in the short-run, but possible long-term earnings are given up.

Types of government expenditures:

  • Current expenditures are those spent on goods/services and paying for factors of production. E.g. wages, drugs for national health system, etc.
  • Capital expenditures are those spent on assets and capital. E.g. building roads, power stations, etc.
  • Transfer payments are used for income redistribution. Examples of these include unemployment benefits, pensions, etc.

The government budget outcome:

  • Budget deficit is when the government expenditure is larger than the government revenue. Budget deficits increase the public (government) debt.
  • Budget surplus is when the government expenditure is smaller than the government revenue. Budget surpluses decrease the size of the public (government) debt.
  • Balanced budget is when the government expenditure is equal to the government revenue.