ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
In a given year a government's total spending exceeds its total tax revenue. What is this shortfall called, and how is it typically financed?
The shortfall is a budget deficit, and governments normally finance it by borrowing, such as issuing bonds. A budget deficit arises when public spending exceeds tax revenue in a year. It differs from a trade deficit, which concerns imports exceeding exports.
- AA trade deficit, financed by exporting more goods
- BA budget deficit, financed by government borrowingCorrect
- CA budget surplus, financed by raising taxes
- DA balance of payments surplus, financed by foreign reserves
Explanation
When spending exceeds revenue the government runs a budget deficit. It usually finances this by borrowing, for example issuing bonds. The accumulated borrowing over years forms the national debt. A trade deficit concerns imports and exports, not the budget.
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