8. Budget

Budgets (a) Calculation of the Budget The Chancellor of the exchequer is the minister of finance in charge of the treasury. The chancellor announces how much the government is going to spend over the next twelve months, sometime in February. The government states how it is going to raise the money to pay for its expenditure each spring in the Budget. Tax

Collection

Income

Direct

Burden Progressive

Advantage

Disadvantages

Fair Disincentive to work Certain Economical Convenient (PAYE) Disincentive to save Large Revenue Raiser

Vat

Duties

Indirect

Indirect

Proportional

Regressive

Economical Convenient Avoidable

Economical Convenient Avoidable

Rates

Direct

Regressive

Economical Certain Unavoidable

Corporation

Direct

Regressive

Economical Certain

Inflationary Discourages Consumption Inflationary Regressive therefore Unfair Regressive

Disincentive to Invest

(b) Type of Budget I. A reflationary or deficit budget where government spending is greater than government income. Reflationary budget increase total demand within the economy. II. A deflationary or surplus budget where government income exceeds expenditure and total demand is falling within the economy. III. A neutral or balanced budget where government income and spending are the same and total demand in the economy remains constant.

Government Borrowing (a) Public Sector Borrowing Requirement If the government spends more than its received income it will have to borrow the difference. The amount the government needs to borrow in a given time period is called the public sector borrowing requirement (PSBR). The PSBR is met by: (i) (ii) (iii)

Selling National savings certificates and premium bonds. Selling treasury bills which are IOUs which will be bought back in ninety-one days’ time Selling securities, which are IOUs paying interest yearly which will be bought back sometime in the future. Securities are sometimes called stocks or bonds.

(b) National debt The total amount owed by the government to UK citizens and foreigners at a particular moment in time is called the national debt. The money raised may have been spent on capital goods which increase our ability to produce goods. Interest has to be paid on the debt. A large national debt is a problem if: (i) (ii)

Interest has to be paid to overseas citizens, so that the balance of payments suffers. Taxes have to be increased to meet interest payments.