Fiscal Deficits & Surpluses (Edexcel IGCSE Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Introduction to Budget Deficits and Surpluses
The Government Budget (fiscal policy) is presented each year as either a balanced budget, a budget deficit, or a budget surplus
A balanced fiscal budget means that government revenue = government expenditure
A budget fiscal deficit means that government revenue < government expenditure
A budget fiscal surplus means that government revenue > government expenditure
Graph: UK Budget for 2023/24
Source: OBR
Graph analysis
Projected expenditure (e.g. on public services, state pensions and debt interest) is expected to be £1,189 billion
The projected revenue from taxes and other sources is expected to amount to £1,058 billion
As government revenue < government expenditure, there will be a budget deficit of £132bn in the fiscal year 2023/24
Impact of a Fiscal Deficit
A budget fiscal deficit means that government revenue < government expenditure
A fiscal deficit has to be financed through public sector borrowing
Public sector borrowing occurs when the government borrows money either from domestic households and firms or from foreigners and foreign governments in order to fund their spending
This borrowing gets added to the public or national debt
Rises in the national debt cause an opportunity cost and possible crowding-out effects
The Impact of Fiscal Deficit
Impact | Explanation |
|---|---|
National debt |
|
Opportunity cost |
|
Crowding out |
|
Impact of a Fiscal Surplus
A budget fiscal surplus means that government revenue > government expenditure
A fiscal surplus can be used to fund capital expenditure on infrastructure, creating long-term economic growth
It can be used to pay back government debt and reduce future costs of servicing debt
A surplus can be set aside for future economic shocks, such as the Covid 19 crisis
However, a surplus may cause economic growth to slow down unnecessarily as the government withdraws (higher taxes) more money than it injects (less spending) into the circular flow of income
A surplus could be deliberate to moderate economic growth and therefore reduce pressure on prices (inflation)
Worked Example
In an economy, the government has the following data available for 2024:
Category | $bn |
Income tax revenue | 4.85 |
Capital spending | 3.26 |
Corporation tax revenue | 3.76 |
Current spending | 5.48 |
Fuel duty | 0.62 |
Calculate the government's budget balance for 2024.
Step 1: Add together all income items
Income: 4.85 + 3.76 + 0.62 = $9.23bn
Step 2: Add together all expenditure items
Expenditure: 3.26 + 5.48 = $8.74bn
Step 3: Calculate the budget balance
Budget balance = $9.23bn - $8.74bn
= $0.49bn surplus
Examiner Tips and Tricks
An exam question may require you to consider the cause of the fiscal deficit or fiscal surplus, as well as the consequence of each. E.g. You may need to consider whether the cause of a deficit, such as bailing out banks during the financial crisis, or spending on health care during the global pandemic, has long term impacts on future growth rates. This is because the extra government borrowing may lead to the crowding out of private consumer and business borrowing, thereby reducing economic activity levels.
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