| Budget Surpluses and Deficits
This section is about government surpluses/deficits, national debt and structural deficits.
Budget Surplus/Deficit
A surplus is positive and may result in the accumulation of cash; on the other hand a deficit is negative and may result in borrowing or the depletion of cash reserves.
A budget surplus or deficit is calculated by Revenues - Spending. Revenues are usually in the form of tax (T); remember T is a withdrawal from the circular flow. Spending is government public spending (i.e. building parks, schools and the NHS) and is denoted by the letter G; it is a component of Aggregate Demand.
If T>G (Taxation/Revenue is bigger than Government Spending) then there will be a budget surplus. The government is receiving more money than it is spending and so it can accumulate this money.
Conversely, if T<G (Taxation is less than Government Spending) then there will be a budget deficit. This can be financed by depleting cash reserves (if there are any) built up from when their was a budget surplus, or through the issue of debt. Government's can issue debt and the HM Government issues bonds known as Guilts. These are issued to financial institutions (banks, insurers and pension funds) as well as ordinary households. The government issues the bonds and receives a certain amount of money (which allows it to spend) it will then promise the bondholder to return their money with interest at a set date in the future. It is a formal IOU!
THE PROBLEM WITH EXPENSIVE DEBT
National Debt
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