The Government Budget and Its Structure

The Government Budget: Revenues, Expenditures, and Balance
Fiscal policy—management of government revenues and expenditures—alongside monetary policy, is a key instrument of macroeconomic regulation. Understanding the structure of the budget, sources of revenue, and directions of expenditure is necessary to assess the fiscal position and its impact on the economy and markets.

Structure of Government Revenues

Government revenues consist of tax and non-tax receipts. Tax revenues include income tax (personal income tax), corporate profit tax, value-added tax (VAT) or sales tax, social contributions (for pension and medical insurance), excise taxes (on alcohol, tobacco, fuel), customs duties, property and real estate taxes.

Non-tax revenues include income from government property (dividends of state-owned companies, rental payments), fees and charges for government services, proceeds from privatization, income from natural resources (for resource-rich countries).

The structure of revenues varies across countries. In the USA, income tax and social contributions play the main role. In European countries, the share of VAT and social contributions is higher. In resource-rich countries, revenues from oil and gas are significant.

Structure of Government Expenditures

Government expenditures are divided into current and capital expenditures. Current expenditures include the salaries of government employees, purchases of goods and services for current needs, social transfers (pensions, benefits), subsidies, interest payments on government debt.

Capital expenditures are directed toward investments in infrastructure, buildings, and equipment.

According to the functional classification, expenditures are divided into defense and security, social protection (pensions, unemployment benefits, social assistance), healthcare, education, economic expenditures (infrastructure, subsidies), general government expenditures, and debt servicing.

Social expenditures (social protection, healthcare, education) constitute the main part of the budget of developed countries. With population aging, pressure on social expenditures increases.

Budget Balance

Budget balance is the difference between revenues and expenditures. If revenues exceed expenditures, the budget has a surplus. If expenditures exceed revenues—a deficit. The deficit is financed by government borrowing (issuance of bonds).

The primary balance—the balance excluding interest payments—shows the fiscal effort of the government regardless of inherited debt. A country with high debt may have a primary surplus but an overall deficit due to large interest expenses.

The structural balance—the balance adjusted for the phase of the economic cycle. In a recession, revenues fall, expenditures on benefits rise, creating a cyclic deficit. The structural balance excludes this cyclical component and shows the “true” fiscal position.

Cyclical Sensitivity of the Budget

The government budget has built-in cyclical sensitivity. In a recession, tax revenues fall (lower profits, incomes, sales), and expenditures on benefits rise. This creates an automatic stabilizing effect: in bad times, the budget automatically becomes more stimulative.

Automatic stabilizers smooth out economic fluctuations without the need for new decisions. Their strength depends on the progressivity of the tax system and the generosity of social protection. European countries with more developed social protection have stronger automatic stabilizers.

Application for Investors

The structure of the budget affects the economy and sectors. Growth in defense expenditures is favorable for defense contractors. Growth in infrastructure investment is favorable for construction companies. Increase in social expenditures supports consumption.

Tax changes directly affect corporate profits. Lowering the corporate profit tax increases net profit; raising it decreases net profit. Changes in taxation of dividends and capital gains affect the attractiveness of stocks for investors.

The budget balance affects the volume of government bond supply. A large deficit increases supply and may pressure bond prices (raise yields).