Government Expenditures
Government expenditures refer to the money spent by a government on various programs, services, and projects. This can include spending on healthcare, education, infrastructure, national defense, public safety, and welfare programs, among others. The level of government spending is a critical component of fiscal policy, as it influences economic activity and can impact the health of a nation's economy.
When governments spend more than they collect in revenue, they run a budget deficit, which must be financed through borrowing. Understanding how government expenditures work is essential to grasp the concept of a budget deficit, as it is the overspending relative to revenue that leads to the need to borrow more funds and, consequently, increase the national debt.
Government Revenue
Government revenue is the income received by the government from various sources. The primary source is taxation, which includes personal and corporate income taxes, sales taxes, property taxes, and other levies. Additional sources of government revenue can be fees, fines, and revenue from government-owned entities.
When discussing fiscal health, government revenue is analyzed in conjunction with expenditures to determine if a government is running a budget surplus or deficit. A consistent shortfall in revenue compared to expenses leads to a budget deficit. On the other hand, if the revenue exceeds expenditures, the government has a budget surplus, which can be used to reduce outstanding debt.
Fiscal Policy
Fiscal policy involves the decisions a government makes regarding public spending and taxation. It is a critical tool for managing the economy, with the goal of achieving sustainable economic growth, controlling inflation, and stabilizing the economy during various business cycles. The two main levers of fiscal policy are government expenditures and taxes.
When a government seeks to stimulate the economy, it may increase spending (expansionary fiscal policy) or cut taxes, thus increasing consumers' disposable income. Conversely, to cool down an overheating economy or address budget deficits, a government might engage in contractionary fiscal policy, which could involve cutting public spending or increasing taxes.
Government Bonds
Government bonds are instruments of indebtedness used by a government to borrow money. Essentially, they are a promise to repay the borrowed funds with interest at a later date. Bonds are sold to investors, including individuals, corporations, and other governments. By issuing bonds, a government obtains the cash it needs to finance a budget deficit without immediately raising taxes.
Government bonds can have varying maturities, ranging from short-term bills to long-term bonds extending over several decades. The national debt is largely composed of these outstanding bonds, and the regular issuance of new bonds is a consequence of successive periods of government deficits.
Budget Surplus
A budget surplus occurs when government revenue exceeds expenditures during a fiscal period. This positive balance allows the government to pay down its debts, investing the surplus in various ways such as improving public services, shoring up emergency funds, or saving for future expenditures.
When a deficit turns into a surplus, the government can use the excess funds to reduce the national debt by repaying borrowed money. However, for the national debt to decrease significantly, the government needs to run continuous surpluses or maintain a surplus large enough to cover and surpass the amounts of debt due, including interest.
