How_Money_Works_-_The_Facts_Visually_Explained

Balancing the books

Government spending today is largely to meet demand,

and typically accounts for around one-third of a country’s

economy. In some countries (such as those in Scandinavia),

government spending accounts for a much greater

proportion than this. Financing this degree of spending can

be a difficult task. While governments aspire to balance

their budgets, most borrow a proportion. What matters is

that the level of borrowing is controlled so that people have

confidence that government debts will always be repaid.

Managing

state finance

In spending money to provide the services that people expect, governments must

aim for maximum cost efficiency. They therefore plan to finance the budget from

a combination of taxation, borrowing, and (very occasionally) printing new money.

Taxation in all its forms is the primary source of funding, with borrowing used as

a means to make up the shortfall. Printing money is rare as it risks undermining

confidence in the value of the currency itself.

PRINT MONEY

Modern governments

very rarely print currency

to finance themselves,

since doing so carries

significant risks.

See pp.124 –125

TA XES

Taxation is the safest

means of raising

money, but is

unpopular as it

represents a loss of

money to the

people being taxed.

See pp.106–107

BORROWING

This is a costly option as

interest will be charged,

and money borrowed

must be paid back.

See pp.108–109

Government revenue

$

$

$

CENTRAL BANK

In the US, the central bank is the

Federal Reserve, known as the Fed.

A country’s central bank manages

the currency and money supply,

holds central bank reserves, and

implements economic targets set

by the government.

See pp.100–103

US_096-097_OV_Managing_state_finances.indd 96 13/10/2016 16:18