Definitions of government budget

Published by Patrick Mutisya · 14 days ago

IGCSE Economics – Government Budget Definitions

Government and the Macro‑economy – Fiscal Policy

Objective: Definitions of the Government Budget

The government budget is a statement of the government’s planned financial activities over a fiscal year. It shows how much money the government expects to receive and how much it intends to spend.

Key Terms

  • Government Revenue: All income received by the government, primarily from taxes, but also from non‑tax sources such as fees, charges, dividends from state‑owned enterprises and borrowing.

  • Government Expenditure: Total outlays made by the government, including:

    • Current (or recurrent) expenditure – wages, subsidies, interest payments.

    • Capital expenditure – spending on infrastructure, schools, hospitals, etc.

  • Budget Balance: The difference between total revenue and total expenditure.

    • If revenue > expenditure → Budget Surplus.

    • If revenue < expenditure → Budget Deficit.

  • Primary Balance: Budget balance excluding interest payments on existing debt.

    \$\text{Primary Balance}= \text{Revenue} - (\text{Expenditure} - \text{Interest Payments})\$

  • Structural (or Underlying) Deficit: The part of the deficit that would remain even if the economy were operating at its potential output. It reflects the stance of fiscal policy independent of the business cycle.

  • Cyclical (or Economic‑cycle) Deficit: The portion of the deficit caused by the economy operating below potential (e.g., during a recession). It disappears when the economy returns to full employment.

  • Cyclically Adjusted Balance (CAB): The budget balance after removing the cyclical component, i.e., the structural balance.

    \$\text{CAB}= \text{Actual Balance} - \text{Cyclical Deficit}\$

Budget Components – Summary Table

ComponentDefinitionTypical Examples
RevenueTotal income received by the government.Income tax, VAT, corporation tax, customs duties, fees.
Current ExpenditureSpending on day‑to‑day operations.Salaries of public servants, welfare benefits, interest on debt.
Capital ExpenditureSpending on long‑term assets.Roads, schools, hospitals, defence equipment.
Budget DeficitWhen total expenditure exceeds total revenue.Deficit = Expenditure – Revenue (positive value).
Budget SurplusWhen total revenue exceeds total expenditure.Surplus = Revenue – Expenditure (positive value).
Primary BalanceBudget balance before interest payments.Primary Balance = Revenue – (Expenditure – Interest).
Structural DeficitDeficit that would exist at full‑employment output.Reflects the underlying fiscal stance.
Cyclical DeficitDeficit arising from the business cycle.Higher during recessions, lower during booms.

Suggested diagram: Flowchart showing the relationship between revenue, expenditure, deficit/surplus, and the adjustments for interest payments and the business cycle.

Why Distinguish These Concepts?

Understanding the different components of the government budget helps economists and policymakers assess:

  1. The sustainability of public finances.

  2. The impact of fiscal policy on aggregate demand.

  3. How much borrowing is required and its effect on national debt.

  4. The appropriate policy response during different phases of the business cycle.