Balancing the Budget
When spending exceeds revenues, the government is running a deficit.
This tends to happen in periods of economic contraction, when automatic fiscal stabilisers reduce tax revenue and increase spending, to support the economy.
- This gap between revenues and expenditure is paid for by borrowing.
When revenues exceed spending, the government is running a budget surplus.
This tends to happen when the economy is in a strong position. Automatic fiscal stabilisers mean that tax revenue tends to be higher when the economy is in a good state.
- This surplus means that the government doesn’t need to borrow to pay for its spending.
What happens when the government runs a deficit?
The September 2022 mini-budget: when deficit spending goes wrong
- Cutting the basic rate of income tax from 20% to 19%
- Abolishing the 45% higher rate of income tax in England, Wales and Northern Ireland - not including Scotland as it is a devolved power
- Reversing plans to increase the corporation tax from 19% to 25%
- Cancelling the increase in National Insurance contributions that was due in April 2022
If the tax cuts did not create the growth which Truss and Kwarteng were expecting, the budget deficit would have increased substantially since the proposed tax cuts were not equally matched with cuts in spending.
Financial markets, who lend money to the government to fund the ‣, were concerned that the mini-budget would increase debt levels to an unsustainable level due to it being unfunded and unlikely to create substantial growth. Furthermore, the Kwarteng refused to consult the Office for Budget Responsibility (independent government watchdog) regarding their economic forecast. This led to chaos in financial markets with the cost of borrowing rising rapidly, leading to the eventual scrapping of most of the policies.
