Cutting Budget Deficits in UK



Cutting Budget Deficits in UK

A budget deficit is the excess of government expenditure over government taxation and any other receipts, in any one fiscal year. The operation of a budget deficit is a useful tool of fiscal policy to enable government to influence the level of aggregate demand and employment in the economy. J.M Keynes advocated this policy in the 1930's to offset the depression that occurred at the time. Prior to this, it was often thought that the government should operate a balanced budget policy, allowing the economy to respond in its own way without government intervention. Keynes argued that government should intervene by deliberately imbalancing its budget in order to inject additional aggregate demand into a depressed economy and vice versa.

The government's annual budget sets out the planned income and expenditure of the government for forthcoming year, together with a statement of the revenue and expenditure for the past financial year. A government's budget deficit or surplus refers to either when its expenditures (the purchases of goods and services, plus its transfers (grants) to individuals and corporations) are greater than its tax revenues(; a deficit). Or when tax revenues exceed government purchases and transfer payments, the government has a budget surplus. there is also a neutral budget where government income and spending are the same and total demand in the economy remains constant. whether a budget is running a deficit or a surplus it is usually used deliberately as an instrument of economic policy, planned in order to bring about economic changes. This is known as fiscal policy.

For 2006-07 the UK government plans to raise total receipts of £518 billion through both direct and indirect tax, with the largest proportion of revenue coming from income tax (£146bn). Although it plans to have a total managed expenditure of £555 billion, with the highest section being spent on social protection (£153bn). So therefore the labour government through a greater amount of public spending than that of revenue raised by taxation is running a budget deficit. The expenditures are larger than the funds received by the government; this resulting deficit tends to stimulate the economy, as goods and services are produced for government purchase. In contrast, if a government runs a surplus by not spending all the funds it collects, economic growth will generally be curtailed, as the surplus funds are removed from circulation in the economy.

Government expenditure (G) is treated as being autonomously determined due to it being subject to political decision; it is therefore regarded as being independent of income. However taxation, unlike government spending, cannot be treated as autonomous since the revenue from taxation bears direct relationship to income, and tax revenue is a function of income. Therefore indirect taxes cause spending at market prices to increase the spending factor cost so that the whole of current spending does not go on to generate incomes; a leakage. Direct taxes are also leakages as they are a compulsory withdrawal of income from households and ...