Budget
This balancing of expenditures and revenues is called the government budget. Below, we will explore different parts of a budget and what happens when governments spend more money than they raise in taxes.
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 doesnāt 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 ā£, 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.
Knowledge Checkpoint: Describe the three types of budget: deficit, surplus and balanced
š“ó §ó ¢ó ³ó £ó “ó æĀ The Scottish Budget
If you live or work in Scotland, the Scottish budget affects many parts of everyday life. It determines how much tax you will pay, and the public services and benefits available to you. Changes to NHS funding, to tax rates or higher investment in infrastructure are all government initiatives that are set out in the budget.
Within the Budget are detailed plans for how the Scottish Government will allocate its funds to each department, changes in tax rates and bands, and changes to welfare benefits. Proposals for new taxes, welfare benefits and public services are also set out in the budget.
Scottish Budget: Revenues
- The Block Grant is the Scottish Governmentās core source of funding and is transferred from the UK Government. The Block Grant is an annual lump-sum transfer from the UK Government to the Scottish Government. The āblockā of money can be spent in any way the Scottish Government sees fit.
- There are also several taxes devolved to the Scottish government, which it has full or partial control over. These are the other main source of revenue in the Scottish Budget.
- Not all of the taxes generating revenue are fully controlled by Scotland, income tax is shared between the UK and Scotland as the UK set personal allowance bands. Scotland receives VAT revenue for their budget, but do not control VAT decisions. Land and Business Transactions Tax and Landfill Tax are however fully controlled by the Scottish Government.
Tax | Revenue Forecast 21/22 |
Land & Business Transactions Tax (LBTT) | Ā£586m |
Landfill Tax | Ā£88m |
Income Tax | Ā£12,263m |
VAT | Ā£5,246m |
Air Passenger Duty | Ā£145m |
Scottish Budget: Spending
- Resource Spending: The resource budget is for the day-to-day spending required to run public services.
- Capital Spending: The capital budget is for investment in assets, infrastructure like buildings and roads.
- Annually Managed Expenditure (AME): AME counts funding that are a devolved responsibility of the Scottish Government but continue to be annually funded by the UK Government on the basis of demand, such as social security payments for pensions and unemployment benefits.
- Financial Transactions: This is spending allocated to the Scottish Government by the UK Treasury to make loans or investments in private sector companies. This spending is repaid to the UK Treasury over time.
