A government’s budget is an estimate presented by fiancé minister of the government’s revenue and expenditure for a year. When the revenues exceed the expenditure the budget is said to be in surplus. In a budgetary deficit situation the government’s expenditure that includes transfer payments and government purchases is greater than the revenue. The real GDP of an economy is the monetary value of all services and goods produced in a year with reference to the prices of a base year. Real GDP excludes the price changes due to inflation or deflation.
In a budget deficit situation the Real GDP may be higher as inflation increases by the increase in money supply by the government to meet the growing debt. The government increases borrowing, interest rates, taxes and decreases the spending to face a deficit situation. At full employment level an economy is operating at full potential, a budget deficit in this situation can be handled only by increasing revenues or cutting down of expenses; this situation is more of a structural deficit. Austerity measures are used by the government to fight the budget deficit. Greece faced this situation on 2009; people were against the government as it cut down the expenditures in Greece’s public sector. The government scrapped many bonuses; taxes were increased and gave private sector business opportunities. A tight fiscal policy results in less improvement as desired as during a depression the vicious circle of unemployment engulfs the private and public sector; lowers the already low wages and leads to further unemployment.
In Greece austerity measures lead to lower tax revenue and increased public expenditure due to recession as the number of poor and unemployed increased.
Bibliography
http://www.mof.gov.jm/budgets
- Moffatt, Mike. What's the Difference Between Nominal and Real? Real Variables and Nominal Variables Explained. 2014.Retrieved from
http://economics.about.com/cs/macrohelp/a/nominal_vs_real.htm
- Simplifying Economics. Economic Effects of a Budget Deficit. 2014. Retrieved from
http://www.economicshelp.org/macroeconomics/fiscal-policy/effects-budget-deficit/
