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(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 Burden Advantage Disadvantages

Income Direct Progressive Fair Disincentive to work

Convenient (PAYE) Disincentive to save

Large Revenue Raiser

Vat Indirect Proportional Economical Inflationary

Avoidable Discourages

Duties Indirect Regressive Economical Inflationary

Avoidable Regressive therefore

Rates Direct Regressive Economical Regressive


Corporation Direct Regressive Economical 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
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) Selling National savings certificates and premium bonds.

(ii) Selling treasury bills which are IOUs which will be bought back in
ninety-one days’ time
(iii) 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) Interest has to be paid to overseas citizens, so that the balance of

payments suffers.
(ii) Taxes have to be increased to meet interest payments.