The budget sets out planned spending and revenue; spending above revenue is a deficit, below is a surplus.
The government budget is the government's plan for spending and for raising revenue, usually over a year. Revenue comes mostly from taxes. Spending goes on areas such as health, education and defence.
A budget deficit is when government spending is greater than government revenue. The government must borrow to cover the gap. A budget surplus is when revenue is greater than spending.
Budget balance = government revenue - government spending. A negative answer is a deficit; a positive answer is a surplus.
Economists often compare a deficit with GDP, the total output of the economy, to judge its size. A deficit of 2% of GDP is easier to manage than one of 10%.
- Government budget
- Plan for government spending and revenue.
- Budget deficit
- Spending > revenue; government borrows.
- Budget surplus
- Revenue > spending.
Worked example: Calculating a budget deficit
Suppose a government collects $95 billion in revenue and spends $105 billion. GDP is $500 billion.
- Budget balance = 95 - 105 = -$10 billion.
- The negative sign means a deficit of $10 billion.
- As a share of GDP: 10 / 500 x 100 = 2%.
- The government must borrow $10 billion, adding to its debt.
Watch out for this
A budget deficit means the country imports more than it exports.
That is a trade or current account deficit. A budget deficit is about the government spending more than it collects.
Check your understanding
A government spends $80 billion and collects $86 billion. What is its budget position?
- A surplus of $6 billion
- A deficit of $6 billion
- A surplus of $166 billion