The relationship between the budget deficit or surplus and the state of the economy is shown above.

Slope

The tax revenue function is upward sloping.

Its slope depends on tax rates.

The government expenditure function is drawn as downward sloping.

At higher levels of income and employment less is paid out in benefits.

Balance

There is only one level of income (Y1 ) where there is a public-sector financial balance.

Below

Below this level of income, there will be a public sector deficit.

Above

Above this level, there will be a surplus.


The further income is from Y1, the bigger will be the deficit or surplus.