The government budget

The government budget is made up of tax revenue and public expenditures. If tax revenues are higher than public spending, there is a surplus in the government budget. If tax revenues are lower than public spending, the government has a budget deficit.

When the government has a budget deficit it must borrow money which increases the national debt. When the government is pursuing an expansionary fiscal policy, the government have to borrow money to cover up for the budget deficit. The government can borrow money from individuals and companies in the country or abroad.

Government borrowing affects interest rates and thus investments in the economy. It is customary to say that when the government borrows money for public consumption they add a burden on future generations.