5.2.1 Federal Budget

The Federal Budget

The federal budget outlines the government’s projected spending, revenue, surplus or deficit, and debt for the forthcoming fiscal year, running from April 1 to March 31, along with projections for at least one subsequent year. The government’s primary sources of revenue include various forms of taxation.

Budget Balance

The budget balance is the difference between total revenue and total spending. The government’s proposed annual budget can have three possible positions:

National Debt

The national debt consists of accumulated past deficits minus accumulated past surpluses in the federal budget. When there is a deficit, the government borrows from the capital markets to finance the national debt. The amounts representing the surplus or deficit each year, along with the current national debt, are crucial. These figures show the extent to which the government needs to borrow in the coming year and its effects on the capital markets.

Borrowing and Capital Markets

Governments finance deficits by issuing debt instruments such as bonds and Treasury bills in capital markets. Some maturing national debt must be refinanced, comprising refinanced debt and new debt borrowings.

Crowd Out Effect

The capital market has a finite amount of capital. When a government borrows significantly from it, less capital remains available for businesses to borrow. This phenomenon is known as crowding out, which can negatively impact the economy. If supply is less than demand, interest rates rise, and borrowing costs increase.

    gantt
	    title Crowding Out Effect
	    dateFormat  YYYY-MM-DD
	    section Government Borrowing
	    Issuing Debt           :done, 2023-01-01, 2023-03-31
	    section Business Borrowing
	    Limited Capital        :done, 2023-04-01, 2023-06-30
	    Rising Interest Rates  :crit, done, 2023-07-01, 2023-12-31

Key Takeaways

• Federal Budget: Annual government plan about revenue and spending.
• Budget Positions: Reveal whether there is a surplus, deficit, or balanced budget.
• National Debt: The total amount of money the government owes from past deficits minus surpluses.
• Crowding Out: When government borrowing limits the capital available for private businesses, potentially raising interest rates.

Glossary

• Budget Surplus: A situation where the government’s revenue exceeds its expenditures.
• Budget Deficit: A situation where the government’s expenditures exceed its revenue.
• Balanced Budget: A situation where the government’s revenue equals its expenditures.
• National Debt: The total outstanding debt owed by the federal government due to accumulated budget deficits and surpluses.
• Treasury Bill (T-Bill): Short-term debt obligation backed by the government with maturities ranging up to one year.
• Crowding Out: The effect where increased government borrowing reduces the amount of capital available for private sector borrowing.

Frequently Asked Questions (FAQs)

1. What is the primary source of revenue for the federal government?

   • The primary source of revenue is various forms of taxation.

2. How does a budget surplus differ from a budget deficit?

   • A budget surplus occurs when revenue exceeds spending, whereas a budget deficit occurs when spending exceeds revenue.

3. What impact does government borrowing have on capital markets?

   • Government borrowing can limit the available capital for businesses, potentially increasing interest rates.

4. What is ‘crowding out’ in the context of government borrowing?

   • ‘Crowding out’ refers to the reduction in available capital for businesses due to significant government borrowing, leading to higher interest rates.

By understanding the components and implications of the federal budget, individuals can better comprehend the broader economic dynamics at play.