Calculations of the size of a government budget deficit/surplus

Government and the Macro‑economy – Fiscal Policy

Objective

To be able to calculate the size of a government budget deficit or surplus and to interpret the result.

Key Definitions

• Government revenue: Money received by the government, mainly from taxes, duties, fees and income from state‑owned enterprises.
• Government expenditure: Total spending on goods and services, public sector wages, interest on debt, subsidies, welfare payments, etc.
• Budget deficit: Occurs when total expenditure exceeds total revenue.
• Budget surplus: Occurs when total revenue exceeds total expenditure.

Formulae

All calculations are expressed in the same monetary unit (e.g., £ millions).

\$\$

\text{Budget Deficit} = \text{Expenditure} - \text{Revenue}

\$\$

\$\$

\text{Budget Surplus} = \text{Revenue} - \text{Expenditure}

\$\$

Alternatively, a single expression can be used:

\$\$

\text{Budget Balance} = \text{Revenue} - \text{Expenditure}

\$\$

where a negative balance indicates a deficit and a positive balance indicates a surplus.

Step‑by‑Step Procedure

1. Gather the latest figures for total government revenue and total government expenditure. These are usually published in the annual budget or national accounts.
2. Ensure both figures are expressed in the same units (e.g., £ million).
3. Subtract the smaller figure from the larger figure to obtain the absolute size of the balance.
4. Determine the sign:

   • If Revenue > Expenditure → surplus.
   • If Expenditure > Revenue → deficit.

5. State the result clearly, e.g., “The government ran a £ 3 billion deficit in 2023/24.”

Worked Example – Budget Deficit

Data for Country A (2023/24):

Calculation:

\$\$

\text{Budget Deficit}=1,020,000-850,000=170,000\ \text{£ million}

\$\$

Interpretation: Country A ran a £ 170 billion deficit in 2023/24.

Worked Example – Budget Surplus

Data for Country B (2023/24):

Calculation:

\$\$

\text{Budget Surplus}=1,150,000-1,080,000=70,000\ \text{£ million}

\$\$

Interpretation: Country B recorded a £ 70 billion surplus in 2023/24.

Common Pitfalls

• Mixing different units (e.g., £ million with £ billion) – always convert to the same unit first.
• Forgetting to include interest payments on the national debt as part of total expenditure.
• Mis‑reading the sign of the balance – a negative result from “Revenue – Expenditure” means a deficit.

Practice Questions

1. Country C reported total revenue of £ 920 million and total expenditure of £ 1,050 million. Calculate the budget balance and state whether it is a deficit or surplus.
2. Country D’s budget shows a surplus of £ 45 million. If total revenue was £ 1,200 million, what was total expenditure?
3. Explain why a government might deliberately run a deficit during a recession.