Budget constraint
Governments have financial constraints just as individuals and
companies do. When spending exceeds income, the government
may need to borrow—or even print—money to cover the shortfall.How it works
Governments need to pay for the public services they
provide and for any other financial commitments
they may have. To do this they tax the population,
and borrow money if additional funds are needed.
In extreme cases it is even possible for governments
to print their own cash. Each strategy has its own
costs—but printing money is so risky that it is very
rarely used directly.
The difference between a government’s tax revenues
and its spending is known as its budget (or fiscal)
deficit. The budget deficit shows how much extra
money the government needs to borrow (or print) to
finance its spending. It is typical for some governments
to run a small budget deficit on an ongoing basis.Spending and
the deficit
Ideally a government’s spending
commitments (inside the circle)
should be covered by tax revenue
and other forms of income.
However, when a proportion of
spending is not covered (budget
deficit), the extra funding has to
be raised either from borrowing
or by printing additional money.
Small deficits can usually be dealt
with by borrowing alone, but if a
deficit grows too large, then the
government may find itself in
financial difficulties as it may need
to borrow increasing amounts
simply to keep up with existing
payments (see pp. 146–7).The
government
spends money on
public services and
other financial
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