What is a Fiscal Budget Deficit?


A budget deficit is when a Government has less tax income than it spends. To fund the extra spending the Government will borrow money from the Central bank or from private investors by issuing Government bonds more commonly known as Treasury bonds.

Some Governments run persistent annual deficits, But why?

Due to an economic cycle, where the economy is in a downturn or for a variety of other reasons.

When an economy is in a downturn, this downturn causes business to make less revenue, pay less wages and employ less people. This means there are less people paying income tax in the UK and businesses which make less revenue are paying less corporation tax. In turn this reduces consumer spending and the amount of tax the UK government is able to receive from Value added tax (VA) etc. As the Uk Government has more people without jobs etc there will also be an increased spending on Benefits such as universal credit.(this will in the long run correct the economic cycle as it will boost spending and increase tax receipts) as people now have more money to spend in shops etc.

So in this case economic cycle led to less tax receipts and more Government spending causing a fiscal budget deficit.

Due to Governments using spending as a tool to boost the economy when the private market(Big and small businesses) isn't functioning well.

The Government will increase spending on infrastructure to create jobs & boost spending which in the long run will create more tax receipts from people spending more money and companies paying more tax due to increased revenues. In the long run this should correct the fiscal deficit.(economic correction).


Some other reasons why there could be a budget deficit:

High levels of tax evasion

Tax evasion might seem like such a minor act but when you consider that those who evade taxes are usually the very wealthy who would account for majority of the tax paid in a country then you begin to see the true effect of tax evasion. This is why HMRC continues to go after those who evade taxes. Tax evasion means the government receives less income from tax as it would normally expect.

High income inequality

When there is high income inequality in a society and the rich are avoiding tax then there will be less tax income received by the Government as those who pay the greater share of tax are not paying and the rest of society don't make enough to pay substantial tax.

Ageing population(e.g mostly retired so don't pay tax)

If the population is made up of a significant amount of retirees then the workforce is essentially not substantial enough to generate enough tax income for the government. Even so, the tax income generated from the workforce goes into paying for the social benefits the retirees receive

Government inefficiency

In some cases public sector services run by Government costs more than they would if run by the private sector. This means the government is being run in an inefficient manner and hence a budget deficit is inevitable.

High levels of Government subsidy

Governments usually provide subsidies to encourage firms to invest in particular industries or to try and make certain industries more competitive on the international markets. If these subsidies make up a majority of government spending then it is very likely they will put the government in a fiscal budget deficit.

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