Chapter 17, Problem 1SCQ

When governments run budget deficits, how do they make up the differences between tax revenue and spending?

To determine

The sources of making up difference in the tax revenue and spending when government runs budget deficit.

Answer to Problem 1SCQ

When the government runs budget deficit, it is made up through internal and external borrowings.

Explanation of Solution

Budget deficit is the difference between the expenditure of the government and the government’s tax revenue. When the government runs budget deficit, it is met through borrowings from internal and external sources. Internal borrowings are public debt i.e. when the government issues T-bills, bonds, etc. in the internal market, it is internal borrowing. When the government borrows from other countries (or from the international market), it is external borrowing.

Thus, when the government runs budget deficit, it is made up through internal and external borrowings.

Economics Concept Introduction

Budget deficit: When the government tax revenue falls short of the government expenditure in a year, the government is said to run a budget deficit. The formula to calculate budget deficit is:

Budget Deficit = $\text{Total expenditure of the government - Total tax revenue of the government}$