CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - Financing the central government budget — borrowing - Notes ^{17 / 17}

Financing the central government budget — borrowing

• Budget deficits

  A budget deficit arises when the government spends more than it receives from taxes

  This will need to be financed by government borrowing.

• Cyclical deficits

  A cyclical budget deficit arises as a consequence of the trade cycle. 

  During a recession, governments will receive less tax but will spend more

• Structural deficits

  Structural deficits are long-term deficits not associated with the trade cycle

  They can be caused by.

  • Increased role of government 

    eg increased spending on government-provided services such as health and education.

  • Past government spending 

    - if the deficit is caused by interest on past borrowing.

Policies to deal With structural deficits

1. Emergency loans from other national governments and international institutions at low interest rates to finance the present deficit.

2. Austerity measures adopted, often as a condition of receiving the emergency loans, to cut public spending and increase taxation. 

   This includes seeking efficiency savings in government spending and even reductions to pension benefits.

3. Sale of state assets governments may be required to sell nationalised industries, mines, land rights and public buildings to private investors to raise the funds needed to repay some of their past borrowings.