Chapter 3: State Budget

Question 1

A government budget

Answer 1

is a document prepared by the government and/or other political entity presenting its anticipated tax revenues (Inheritance tax, income tax, corporation tax, import taxes) and proposed spending/expenditure (Healthcare, Education, Defence, Roads, State Benefit) for the coming financial year.

Question 2

Fiscal policy

Answer 2

is the use of government revenue collection ( taxes or tax cuts ) and expenditure to influence a country’s economy

Question 3

State/Government revenue

Answer 3

is money received by a state/government from taxes and non-tax sources (Ex: bond issues and profits of state-owned companies) to enable it to undertake government expenditures.

Question 4

Government revenue as well asgovernment spendingare components of the_______ and important tools of the government’s________

Answer 4

government budget; fiscal policy

Question 5

The _______ is the most basic task of a government. Because revenue is necessary for the _______ and ______, and this necessity of revenue was a major factor in the development of the modernstate.

Answer 5

collection of revenue;
operation of government;
enforcement of its laws;

Question 6

State/Government revenue has two major sources:

Answer 6

1. Tax collection by government
   
   • Direct tax
   • Indirect tax
2. Government borrowing
   
   • Borrowing money from its own citizens
   • Borrowing money from foreigners

Question 7

The government primarily funds its spending on the economy through tax revenues it earns. However, when revenue is insufficient to pay for expenditures, it resorts to ______.

Answer 7

borrowing

Question 8

Borrowing can be short-term/long-term and involves selling government _______. Treasury bills are also issued into the money markets to help raise _______.

Answer 8

bonds/bills;
short-term cash

Question 9

State/ Government Budget expenditure

Answer 9

refers to money spent by the public sector such as defense, roads, and bridges; merit goods such as hospitals and schools, and welfare payments and benefits includingunemploymentand disability benefits.

Question 10

In national income accounting, when the government acquires goods and services for current use to directly satisfy the individual or collective needs and requirements of the community, it is classified as______.

Answer 10

government consumption spending

Question 11

When the government acquires goods and services for future use, it is classified as ______. This includes public consumption and public investment.

Answer 11

government investment

Question 12

State budget deficit

Answer 12

occurs when spending exceeds income — when the total amount of money that you’re spending is greater than the total amount of money that you’re bringing in. This can occur at small and large scales.

Question 13

The exact causes of a government budget deficit can be hard to track down, but in general, they are caused by ________. That’s because the government’s main source of revenue is taxation, so having low tax income means that the government’s total income is low.

Answer 13

low taxes and high spending

Question 14

Government budget deficits can be caused by a number of factors:

Answer 14

• Tax cuts that decrease revenue, such as those intended to boost large companies’ ability to hire employees
• Low GDP (gross domestic product — the money being made in the country) resulting in low overall revenue, and so low tax revenue
• Poorly-designed tax structures that under-tax high-earners and over-tax low-earners
• High spending on many programs, like Medicare and Social Security
• High military spending
• High spending on subsidies to various industries

Question 15

Debt sustainability

Answer 15

is the ability of a country to meet current and future debt service obligations in full, without:
- Debt rescheduling; accumulation of arrears; default;
- Compromising economic growth.

Question 16

Debt sustainability is essential for:

Answer 16

• Economic stability, growth, development and poverty reduction;
• Fiscal management;
• Access to capital markets.

Question 17

Types of Fiscal Rules

Answer 17

• Debt rules set an explicit limit or target for public debt in percent of GDP;
• Budget balance rules constrain the variable that primarily influences the debt ratio and are largely under the control of policy makers;
• Expenditure rules set limits on total, primary, or current spending;
• Revenue rules set ceilings or floors on revenues and are aimed at boosting revenue collection and/or preventing an excessive tax burden.
  Note: Some countries combine two or more fiscal rules

Question 18

Solutions to Budget Deficit