“DEFICIT FINANCE”

FINAL TOPIC
OBJECTIVES:

 IDENTIFY THE THREE TYPES OF GOVERNMENT BUDGET.

 DISCUSS THE MERITS AMD DEMERITS OF THE BUDGET
TYPES.
 PROVIDE AN OVERVIEW PHILIPPINE BUDGET DEFICIT
WHAT IS GOVERNMENT BUDGET?

 A government budget is an annual financial statement

which outlines the estimated government expenditure and
expected government revenue for the forthcoming fiscal
year.

 A budget is an estimation of revenue and expenses over a

specified future period of time and is utilized by
governments, businesses, and individuals.
Spending Priorities

 L-aw, Public Order, and Safety

 E-ducation and Social Protection
 G-ood Governance and Justice
 A-griculture, Environment, Natural Resources, and Risk
Resiliency
 C-onstruction and Economic Development
 Y-outh and the Marginalized
THREE TYPES OF BUDGET

 BALANCED BUDGET
 BUDGET SURPLUS
 BUDGET DEFICIT
WHAT IS BALANCED BUDGET?

 A government budget is said to be a balanced budget if

the estimated government expenditure is equal to
expected government revenue in a particular financial
year. Advocated by many classical economists, this type of
budget is based on the principle of “living within means.”
They believed the government’s expenditure should not
exceed their revenue.
MERITS OF A BALANCED BUDGET

 Ensures economic stability, if implemented successfully.

 Ensures that the government refrains from imprudent
expenditures.

a) It ensures financial stability.

b) It avoids wasteful expenditure.
DEMERITS OF A BALANCED BUDGET

 Unviable at times of recession and does not offer any

solution to problems such as unemployment.
 Inapplicable in less developed countries as it limits the
scope of economic growth.
 Restricts the government from spending on public
welfare.
WHAT IS BUDGET SURPLUS

 A government budget is said to be a surplus budget if the

expected government revenues exceed the estimated
government expenditure in a particular financial year.
This means that the government’s earnings from taxes
levied are greater than the amount the government
spends on public welfare.
Advantages of a budget surplus
 A surplus allows a government to repay some of their existing
national debt
 This might lead to a fall in bond yields which makes future
government borrowing less expensive
 A budget surplus gives a government scope for meeting a
future crisis e.g. a fiscal stimulus during a downturn or in
response to an external shock
 Government might use a budget surplus to cut taxes to
stimulate the supply-side of the economy
 Surplus revenues might be used to fund an increase in public
sector infrastructure spending
Potential drawbacks of a budget
surplus
 If taxes > government spending, this is a net leakage from
the circular flow of income which can have a deflationary
effect on real GDP.
 Fiscal austerity to achieve a budget surplus can have
damaging effects on the quality of public services and
might increase inequality.
OVERVIEW OF BUDGET SURPLUS IN PHIL

 The last year the Philippines saw a budget surplus for the
national government was 1974, just after the first oil
price shock. Since then the budget deficits have been
chronic.
BUDGET DEFICIT

 A government budget is said to be a budget deficit if

the estimated government expenditures exceed the
expected government revenue in a particular financial
year.

 This deficit can be viewed in two ways:

1. a case where the government is not earning
enough
2. where it is spending too much.
MERITS OF A DEFICIT BUDGET

 Helps in addressing public concerns such as

unemployment at times of economic recession.
 Enables the government to spend on public
welfare.
DEMERITS OF A DEFICIT BUDGET

 Can encourage imprudent expenditures by the

government.
 Increases burden on the government by
accumulating debts.
3 Types of Budget Deficits and their
Measures

 (i) Revenue deficit = Total revenue expenditure –

Total revenue receipts.
 (ii) Fiscal deficit and = Total expenditure – Total
receipts excluding borrowings.
 (iii) Primary deficit.= Fiscal deficit-Interest
payments.
1. Revenue deficit

 signifies that government’s own earning is insufficient to

meet normal functioning of government departments and
provision of services. Revenue deficit results in borrowing.
Simply put, when government spends more than what it
collects by way of revenue, it incurs revenue deficit.
Mind, revenue deficit includes only such transactions
which affect current income and expenditure of the
government.
Remedial measures:

A high revenue deficit warns the government either to

curtail its expenditure or increase its tax and non-tax
receipts. Thus, main remedies are:
(i) Government should raise rate of taxes especially on rich
people and any new taxes where possible,
(ii) Government should try to reduce its expenditure and
avoid unnecessary expenditure.
2. Fiscal Deficit:

 Fiscal deficit is defined as excess of total budget

expenditure over total budget receipts excluding
borrowings during a fiscal year. In simple words, it is
amount of borrowing the government has to resort to
meet its expenses. A large deficit means a large amount of
borrowing. Fiscal deficit is a measure of how much the
government needs to borrow from the market to meet its
expenditure when its resources are inadequate.
Can there be fiscal deficit without a
Revenue deficit?
 Yes, it is possible
(i) when revenue budget is balanced but capital budget
shows a deficit or
(ii) when revenue budget is in surplus but deficit in
capital budget is greater than the surplus of revenue budget.
Implications:
(i) Debt traps:
Fiscal deficit is financed by borrowing. And borrowing creates problem of not
only (a) payment of interest but also of (b) repayment of loans. As the
government borrowing increases, its liability in future to repay loan amount
along with interest thereon also increases. Payment of interest increases revenue
expenditure leading to higher revenue deficit
(ii) Wasteful expenditure:
High fiscal deficit generally leads to wasteful and unnecessary expenditure by
the government. It can create inflationary pressure in the economy.
(iii) Retards future growth:
Borrowing is in fact financial burden on future generation to pay loan and
interest amount which retards growth of economy.
How is fiscal deficit met?

 Since fiscal deficit is the excess of govt. total expenditure

over its total receipts excluding borrowings, therefore
borrowing is the only way to finance fiscal deficit.
3. Primary Deficit:

 Primary deficit is defined as fiscal deficit of current year

minus interest payments on previous borrowings. In other
words whereas fiscal deficit indicates borrowing
requirement inclusive of interest payment, primary deficit
indicates borrowing requirement exclusive of interest
payment (i.e., amount of loan).
 four basic methods of financing a budget
deficit:
(a) the creation of currency, when the Central Bank holds part of
the newly issued debt, thereby monetizing it, and it ends up in the
hands of the public as freshly printed money or in bank vaults as
excess reserves;
(b) raising reserve requirements, when banks are made to hold
additional required reserves in the form of cash, balances with the
Central Bank, or eligible government securities;
(c) domestic open-market borrowing, when government debt is
voluntarily held by the banks or the public for the interest it pays;
and
(d) foreign borrowing, when the national government borrows
abroad.
Deficit Financing

 Deficit financing is defined as financing the budgetary

deficit through public loans. Deficit financing is an
approach to money management that involves spending
more money than is collected during the same period
Objectives of Deficit Financing

 To finance war.
 Economic development.
 Mobilization of resources.
 To granting subsidies.
 To increase in aggregate demand.
 For payment of interest.
Adverse effect of deficit financing

 Leads to inflation.
 Adverse effect on saving.
 Inequality.
 Adverse effect on investment.
 Problem of balance of payment.
 Change in pattern of investment.
 Leads to inflation  Adverse effect on savings
Deficit financing may lead to inflation. Deficit financing leads to inflation
Due to deficit financing money supply and inflation affects the habit of
increases & the purchasing power of the voluntary saving adversely. Infect it is
people also increase which increases the not possible for the people to maintain
aggregate demand and the prices also the previous rate of saving in the state
increase. of rising prices.
 Inequality  Adverse effect on Investment
In case of deficit financing income Deficit financing effects investment
distribution becomes unequal. During adversely when there is inflation in the
deficit financing deflationary pressure economy trade unions make demand for
can be seen on the economy which higher wages for that they go for strikes
make the rich richer and the poor, and lock outs which decreases the
poorer. The fix wage earners are badly efficiency of Labor and creates
effected and their standard of living uncertainty in the business which a
detoriates thus no gap b/w rich & poor decreases the level of investment of the
increases. country.
 Problem in BOP  Change in pattern of investment
Deficit financing leads to inflation. A Deficit financing leads to inflation.
During inflation prices rise and reach to
high price level as compared to other
a very high level in that case people
countries will make the exports more
instead of indulging into productive
expensive and thus they start declining.
activities they start doing speculative
On the other hand rise in domestic
activities.
income and price may encourage people
to import more commodities from
abroad. This will create a deficit in
balance of payment and the balance of
payment will become unfavorable.
Sources of Financing Deficit

(1) Bank borrowing.

(2) Non-bank borrowing ] Domestic Borrowing.
- through the sale of government. Treasury Bills. Short
Term Federal Bonds, Defense Saving Certificate etc.
(3) External borrowing.
HOW THE GOVERNMENT INFLUENCES
THE ECONOMY
 FISCAL POLICY – government use of taxation and spending
to influence the economy.
 MONETARY POLICY – government efforts to influence the
economy by controlling the money supply.
 QUIZ
Q-1 DEFINE BALANCED BUDGET.
ANSWER: A government budget is said to be in balance if budget receipts are equal to
the budget expenditure.
Q.2- WHEN IS BUDGET SAID TO BE A ‘SURPLUS BUDGET’? Explain.
ANSWER: If budget receipts are more than the budget expenditure, then the budget is
termed as ‘Surplus Budget’
Q.3- What is the “government’s budget deficit”? Does a tax cut increase or decrease the
budget deficit’? Explain.
ANSWER: If budget receipts are less than the budget expenditure, then the budget is
termed as ‘Deficit Budget’.
Q-4 WHAT DO YOU UNDERSTAND BY THE TERM “UNBALANCED BUDGET”. ANSWER: A
government budget is said to be unbalanced if estimated government receipts are not
equal to the estimated government expenditure.
QUIZ

5. How the government influence the economy?

6. The difference between the actual government budget deficit and its debt
service payments is defined as the...
a) ...primary budget deficit.
b) ...cyclically-adjusted budget deficit.
c) ...FISCAL budget deficit.
d) ...REVENUE budget deficit
ASSIGNMENT
1. Assess THE government performance on external debt ON THE TERM OF
FOLLOWING PRESIDENTS.
3.1 Ferdinand Marcos (Dec 1965 – Feb 1986)
3.2 Corazon Aquino (February 1986 – June 1992)
3.3 Fidel V. Ramos (June 1992 – June 1998)
3.4 Joseph Ejercito Estrada (June 1998 – Jan 2001)
3.5 Gloria Macapagal-Arroyo (Jan 2001 – June 2010)
3.6 Benigno "Noynoy" Aquino III (Jun 2010 – Jun 2016)
2. DISCUSS THE Risks of external debt to Philippine economy