What this lesson teaches
I can define a government budget, deficit and surplus, and calculate their size.
Syllabus K343, 4.2.1. Government budget: definitions of: government budget, government budget deficit, government budget surplus; calculations of the size of a government budget deficit/surplus
Make a guess
A country has a budget deficit. Does that mean it imports more than it exports?
- No. It means the government spends more than it collects.
- Yes, because the government buys imports.
- No. It means the country exports more than it imports.
Show the answer
No. It means the government spends more than it collects.
A budget deficit is about government revenue and spending. Imports and exports are measured in the current account.
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.
Try it step by step
Problem 1
Year 1: revenue $80 billion, spending $84 billion, GDP $400 billion. The year before, the deficit was 2% of GDP.
Show the working
- Budget balance: $80bn - $84bn = -$4bn, a deficit of $4 billion
- Surplus or deficit as a percentage of GDP: $4bn / $400bn x 100 = 1% of GDP (deficit)
- Change from the year before: The deficit fell from 2% to 1% of GDP.
Problem 2
Year 2: revenue $100 billion, spending $109 billion, GDP $450 billion. The year before, the deficit was 1% of GDP.
Show the working
- Budget balance: $100bn - $109bn = -$9bn, a deficit of $9 billion
- Surplus or deficit as a percentage of GDP: $9bn / $450bn x 100 = 2% of GDP (deficit)
- Change from the year before: The deficit rose from 1% to 2% of GDP: a rise of 1 percentage point.
Problem 3
Year 3: revenue $120 billion, spending $114 billion, GDP $500 billion. The year before, the deficit was 2% of GDP.
Show the working
- Budget balance: $120bn - $114bn = +$6bn, a surplus of $6 billion
- Surplus or deficit as a percentage of GDP: $6bn / $500bn x 100 = 1.2% of GDP (surplus)
- Change from the year before: From a deficit of 2% to a surplus of 1.2%: a change of 3.2 percentage points.
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 $166 billion
- A deficit of $6 billion
- A surplus of $6 billion
Show the answer
A surplus of $6 billion
Right. Revenue is greater than spending by $6 billion.
Check your understanding
A government's revenue is $90 billion and its spending is $96 billion. GDP is $600 billion. What is the budget deficit as a percentage of GDP?
- 15%
- 1%
- 6%
- 16%
Show the answer
1%
Right. The deficit is $96bn - $90bn = $6bn, and $6bn / $600bn x 100 = 1%.