9) Fiscal Policy 2: The Budget - MMT

Question 1

What is a budget?

Answer 1

A financial plan, an outline of expected spending and expected revenue for the next financial period

Question 2

When/where do governments announce their budget?

Answer 2

Every year, once a year, governments everywhere announce their budget

Question 3

What are the 3 key things to look out for in a budget?

Answer 3

1) G - how much is the government planning to spend and what key areas are targeted for more or less expenditure?
2) T - what does the government aim to raise in taxation revenue and how much will each type of tax contribute? What changes are made to the rate at which individual taxes are charged?
3) what is the expected balance between expected G and expected T

Question 4

What are the 3 possible outcomes to any budget?

Answer 4

Balanced, Surplus or Deficit

Question 5

What is a balanced budget?

Answer 5

In an ideal world, the government would like to balance their budget. In this case G=T; in other words, the amount raised in taxation would exactly equal the amount spent in G

Question 6

Is getting a balanced budget easy?

Answer 6

Pretty much impossible to achieve exactly but it remains a vital aspiration for many governments. Realistically the goal is to have any gap between G and T as close to zero as possible

Question 7

What is a Budget Surplus?

Answer 7

T is greater than G (T>G) ie the government raises more in taxation than it spends in G

Question 8

When does/did a budget surplus happen?

Answer 8

This occasionally happens, the last annual surplus for the UK government was 2000, however it was not actually planned, a balanced budget was the target

Question 9

Why did a budget surplus happen in 2000?

Answer 9

A balanced budget was the target, the economy was strong that year, G was lower and T higher than anticipated

Question 10

What’s the problem with having a budget surplus?

Answer 10

They are very difficult to justify politically - voters want to know why they are paying so much tax ID the government isn’t spending it

Question 11

What is a budget deficit?

Answer 11

Here G is greater than T (G>T) - the government is expecting to spend more than it intends to raise in taxation

Question 12

Is balanced budget, budget surplus or budget deficit most common?

Answer 12

Budget deficit, this is by far the most common situation; every year since 2000 the UK had run a budget deficit

Question 13

In 2022:
UK government expenditure was approx £1,182 bn
UK taxation revenue approx £1,005 bn
Therefore the budget deficit was expected to be…

Answer 13

£177bn

Question 14

Why does the UK (and most other governments) spend more than they earn in tax? (Talk about tax)

Answer 14

Often based on political judgements: taxes are unpopular and it is very difficult for governments to increase rates of taxation

Question 15

Why does the UK (and most other governments) spend more than they earn in tax? (Talk about demand)

Answer 15

In a modern world, the amount of demands placed on Governments leads to constant increases in G, for example in the UK (and most developed countries) we have an aging population, meaning far greater demands on the NHS, pension payments, social care etc

Question 16

What is ‘public sector net borrowing’/budget deficit?

Answer 16

With total spending in a year is higher than total receipts, the Government needs to borrow to cover the difference. This gap is known as ‘public sector net borrowing’ or budget deficit

Question 17

How do the government borrow through ‘public sector net borrowing’?

Answer 17

Mostly, this borrowing is done through selling government bonds

Question 18

Why would people want to buy government bonds?

Answer 18

Buying a government bond is seen as an investment, where you loan money to a government in return for an agreed rate of interest

Question 19

How do investors use government bonds?

Answer 19

Investors use them to get a set return paid at regular intervals

Question 20

In the UK government-issued bonds are known as…

Answer 20

Gilts

Question 21

In the US government-issued bonds are known as…

Answer 21

Treasuries

Question 22

Why are buying government bonds seen as low risk?

Answer 22

While all investment incurs risk, government bonds from established and stable economies are regarded as being comparatively low-risk investments meaning the government rarely has difficult financing a deficit

Question 23

When do governments repay a bond?

Answer 23

After an agreed period, eg 10 years