Ideally, the total amount of government revenues should cover the amount of expenditure items of the state budget. In the event that budget expenditures are equal to revenues, the budget is considered balanced, if revenues exceed expenditures, there is a surplus of the state budget; when expenditures exceed revenues, then there is a deficit of the state budget.
The budget deficit is the amount by which government expenditures for a certain period exceed budget revenues. The budget deficit is calculated as the difference between expenditures or purchases of goods and services, social payments and income equal to net taxes (taxes minus social payments). In countries with developed economies, a budget deficit within 3% of GNP is considered normal.
A distinction is made between “structural deficit” and “cyclical budget deficit”. Their application is explained by the fact that the real levels of budget revenues and expenditures largely depend on the stage of the business cycle in which the economic system resides. The budget deficit increases during periods of recession as government revenues from tax revenues decline and transfer payments increase. During an economic recovery, the opposite situation arises.
To a certain extent, the state budget deficit may be due to the ongoing fiscal (fiscal) policy. Therefore, it is necessary to distinguish between changes in the budget that occur under the influence of discretionary fiscal policy and changes resulting from fluctuations in the economic system during the business cycle. If the government lays in the state budget an excess of expenditures over revenues, then a structural budget deficit is formed, i.e. it arises as a result of its conscious planning in connection with the implementation of certain socio-economic programs. This is the state budget deficit at the natural level of unemployment. The structural budget deficit is covered mainly by domestic financing: loans from the National Bank, the issue of government securities.
If, in the course of implementing the state budget, a positive balance is formed between the actually observed and structural budget deficit, a cyclical budget deficit arises. The reason for its formation is changes in the economic cycle. This is the deficit of the republican budget, formed as a result of a drop in business activity and a reduction in tax revenues. As a result, there is, on the one hand, underproduction and shortfall in the state budget; on the other hand, the growth of payments and benefits for unemployment and other social programs. For the first reason, the items of income are not provided, for the second reason, the items of expenditure of the state budget are increasing.
The effects of the fiscal deficit are reflected in the increase in the amount of savings used to finance public expenditures and in the reduction in the amount of funds allocated to finance investment. In the future, the growth of the deficit leads to a decrease in the standard of living. In this regard, governments are undertaking various methods of budget regulation aimed at minimizing and controlling the deficit, among which are: lending by the Central (National) Bank of the State represented by the Ministry of Finance; lending by the non-banking sector; attraction of external sources of financing; money emission.
In economic theory, there are three concepts of budget regulation:
the concept of annually balanced budgets, according to which the fiscal activity of the state as a countercyclical, stabilizing force is excluded. Balancing is carried out with the help of operational state regulation of revenues and expenditures; the concept of a budget balanced on a cyclical basis assumes that the government implements counter-cyclical policies and at the same time balances the budget. At the same time, the budget is balanced not annually, but during the economic cycle. Thus, during a recession, the government reduces taxes and increases public spending, which leads to a budget deficit. In a period of economic growth, the Government took the opposite measure, using the budget surplus to recoup the previous deficit; the concept of functional finance, according to which the main purpose of public finance is to stabilize the economy, and the problems caused by deficits or surpluses are of secondary importance. This is justified by the fact that during periods of recovery, budget revenues increase automatically, therefore, the budget deficit will be independently eliminated.
In general, it was possible to achieve a balanced budget, and in some years it was possible to reduce the budget to a surplus by such states as Luxembourg, Singapore, South Korea, Latvia, Estonia, Slovenia. However, in the 90s, the majority of developed, developing and transition economies were characterized by a budget crisis. It grew most rapidly in Sweden, Finland, Denmark, and Norway.
Most developed countries finance budget deficits through non-emission sources, regulating revenues and expenditures. Therefore, the amount of net cash credit to the central government is small. In developing countries and countries with economies in transition, where financial markets are underdeveloped, the large size of the deficit reflects the emission nature of budget financing. The highest deficits are in Russia, Armenia, Argentina, and Brazil.
Public debt is the total amount of debt a government owes to holders of government securities equal to the sum of past budget deficits less budget surpluses. Or, in other words, the national debt is the amount of issued and outstanding government loans with unpaid interest on them. It is formed by the temporary mobilization of additional funds by the state to cover its expenses by issuing government loans. In developed countries, government loans are divided into bonded and non-bonded. Bondholders can be social insurance funds, central and commercial banks, non-bank financial institutions, and the population. Non-cloud loans include government loans from Sberbank and external intergovernmental loans.
One of the reasons that give rise to public debt is recessions in production. In the period of falling business activity, built-in stabilizers automatically work: tax revenues are reduced and cause a budget deficit. Attempts to reduce it by selling government securities and government loans create and increase public debt. Another reason for the formation of public debt is the militarization of the economy and war. During this period, the economy is characterized by a reorientation of part of the resources to the needs of military production (weapons, maintenance of military personnel). Since the military sector was not a productive sector, but only a consuming one, the Government was seeking funds to finance it. There are three main sources of financing these expenses: increasing taxes, issuing money, selling bonds to the population. Despite the fact that in practice all three sources are used, the first two lead to the most serious negative consequences for the economy. An increase in taxes in the short term undoubtedly increases tax revenues to the budget; however, in the long term, they lead to their reduction, since the tax burden restrains entrepreneurial activity. The issue of money not provided with goods and services increases inflation and undermines the mechanism of functioning of the entire national economy. The issue of securities, on the one hand, allows you to attract the savings of the population, and on the other hand, it forms and increases the public debt.
Depending on the currency placement market in which loans and other means of payment are issued and placed, internal and external debt are distinguished; depending on the maturity – capital and current debts.
Domestic debt is the debt of the state to individuals and legal entities of a given country who are holders of securities issued by its government.
External public debt is a country’s debt to states, individuals and legal entities of other countries. It differs from “foreign debt” in that external debt is the amount that the state borrowed to cover the balance of payments deficit. The presence of external debt leads to the loss of part of the national product and the fall of the country’s prestige.
The economic consequences of public debt are manifold. First, it reduces the stock of capital in the economy. The diversion of capital for the purchase of bonds and bills of exchange leads to a decrease in equity capital. This means a reduction in output and a drop in the standard of living in the future. Secondly, interest payments on public debt are burdensome for the population, as they are covered by an increase in taxes and an additional issue of money. Thirdly, domestic debt payments are accompanied by a redistribution of income among the population in favor of the wealthiest strata.
However, the growth of domestic debt is considered less dangerous than external debt. To repay the external debt, the nation is forced to pay part of the national product, real estate. Of no small importance is that the growth of external debt undermines the credibility of the country; increases the uncertainty of the population in the future; the debt burden is being shifted to the next generation.
To quantitatively characterize public debt, indicators of total debt, the ratio of its various types, the difference in loans received and issued, a comparison of the amount of public debt with the volume of GNP and GDP, and the calculation of debt per capita are used. To assess external debt, the degree of so-called involvement in external debt is determined, which is calculated as the ratio of the volume of external debt to gross product. In addition, two more indicators characterizing the solvency of the country are calculated. One of them shows the ratio of the amount of external debt to the amount of foreign exchange earnings (calculated for the year), the second correlates the annual amount of debt with the volume of foreign exchange earnings for the year. The critical value of this indicator is 25%.
The budget deficit and the national debt are closely interrelated. This is explained by the fact that government loans are the most important source of covering the budget deficit. When the budget is in a state of deficit, the public debt increases, as the government is forced to take out loans to pay for its expenses, which are not reimbursed by tax revenues. When there is a budget surplus, the excess of revenues over expenditures helps the government to pay off the population, to repay its debt. But in any case, the debts of the government are covered by taxpayers.
In 1996, public debt (in % of GDP) in some countries amounted to: Austria – 69.8, Belgium – 130.0, Great Britain – 56.3, France – 56.2, Germany – 60.7, Italy – 123.6, Luxembourg – 6.4, Spain – 70.3, Sweden – 77.7.
With the advent of debt, there is a need for its management, which is understood as a set of actions of the state to repay and regulate the amount of state credit, as well as to attract new borrowed funds.
Repayment of public debt and interest on it is made either by refinancing – the issuance of new loans in order to pay off the bonds of old loans, or by conversion and consolidation.
Conversion is a change in the terms of the loan and the amount of interest paid on it or turning it into a long-term foreign investment. In this case, foreign creditors are invited to purchase real estate, participate in the joint investment of capital, privatization of state property. Private national firms of the creditor country buy out the obligations of the debtor country from their state or bank and, with mutual consent, use them to acquire property.
The consequence of such a conversion is an increase in foreign capital in the national economy without the flow of financial resources into the country.
Consolidation is a change in the terms of a loan associated with a change in maturity dates, when short-term liabilities are consolidated into long-term and medium-term ones. Such consolidation is possible only with the mutual consent of the borrowing government and the creditor government.
The burdensomeness of public debt and the imposition of conditions in its formation lead to the fact that in modern conditions countries are trying to move from a policy of deficit financing to deficit-free budgets. The new budget policy is primarily expressed in changes in the revenue side of state budgets, stimulating investment activities and expanding the tax base due to the growth of revenues and profitability of the national economy.