2.2.4 Government spending Flashcards
What is budget deficit?
Government spending exceeds tax revenue earned; this means that the government must
have borrowed in order to finance its spending
What is budget surplus?
Government spending is less than tax revenue earned; the government can pay back some
of its debts
What is a cyclical budget deficit?
A situation in which government spending is greater than tax revenue, because the economy
is in recession (growth is slowing or negative) – the government will automatically receive less tax revenue if fewer people are in work, and will automatically have to spend more as demand for benefits rises etc
What is a balanced budget?
Government spending is equal to tax revenue
What is a structural budget deficit?
A situation in which government spending is greater than tax revenue, but not related to the
economic cycle e.g. the government may choose to spend more because it wants to support
particular industries or develop more infrastructure to support future growth
What happens to tax revenue when GDP is rising?
When GDP is rising i.e. in an economic recovery or boom, the government will automatically receive more tax revenue, even if the rate of tax does not change
List examples of the tax revenue received by the government.
- More revenue from income tax, as people’s income rises and more people are in work
- More revenue from corporation tax, as business profits rise
- More revenue from VAT / sales taxes, as people spend more on goods and services
- More revenue from capital gains taxes, as rising GDP causes people to buy more assets (such as
houses and shares), pushing up their price and leading to a rise in the value of assets
When would the government likely spend less?
- Fewer people may be out of work, and so there may be less spending on unemployment benefits
- Working households may see pay increases, and so less needs to be spent on other forms of benefits
- Some people will choose to pay for private healthcare or private education, so there may be less
spending needed on the NHS or schools - Crime levels tend to be lower when the economy is growing, so less spending needed on the police
What is current spending?
involves recurring spending on providing public services including the pay of teachers and nurses
and civil servants.
What are examples of current spending?
What is capital spending?
spending on projects to provide new public infrastructure
What are examples of capital spending?
What is the significance of government spending?
How can state sector spending affect incomes?
- Direct effects of welfare spending such as the state pension, unemployment benefits and other benefits
- Government spending creates jobs both in the public and the private sector e.g. multiplier effects from an
increase in state infrastructure spending - Government subsidies may help to keep prices lower than they might otherwise be. This helps to improve the
real incomes of consumers who benefit from a subsidy
