A feature of fiscal policy is that a government must plan what it wants to spend, and how much it needs to raise in income or by borrowing. It needs to make a plan in order to establish how much taxation there should be, what form the taxes should take and so which sectors of the economy the money should come from. This formal planning of fiscal policy is usually done once a year and is set out in the Budget.

Balanced budget

lf the government manages to balance its revenues and its spending, then a balanced budget is said to exist.

Budget deficit

If the government spends more than it collects from its revenues then a budget deficit exists.

Budget surplus

If there is more government revenue than is spent, the government has a budget surplus.

Cyclical deficit

In the short term, a government may welcome a budget deficit if there is a low level of economic activity.

A budget deficit that occurs due to automatic stabilisers is known as a cyclical deficit.

A government is unlikely to be concerned about this as it will move towards a balance as economic activity increases.

Structural deficit

A government will, however, be concerned about a structural deficit.

A structural deficit arises when a government is committed to too much spending relative to its tax revenue.

In this case, the deficit will not disappear when GDP increases.