Balanced and Unbalanced Budget, Ways of financing Budget Deficit

Definition Of Budget
A budget may be defined as a financial statement of the total estimated revenue and the proposed expenditure of a government in a given period of time, usually a year.

Importance or uses of budget
The budget of a country is used to achieve the following objectives:
1. Allocation of resources: Budget is usually use to allocate resources from one sector of the economy to another.


2. To communicate government economic objectives and policies: Government usually uses budget as a medium to communicate her economic objectives and policies to its people.

3. Appraisal of government performance: Budget is used by the citizens and international community to appraise the performance of the government.

4. To foster economic growth and development:  Budget is generally used to foster economic growth and development of a country.

5. Budget is used to curb inflation and deflation: Budget is generally used to control inflation and deflation in the economy.





Meaning and reasons for balanced budget
A balanced budget of a government is a budget with revenue equal to expenditure. In other words,  balanced budget occurs when the total estimated revenue of a government equal to the proposed expenditure. Most economists have also agreed that interest rates, increase savings and investment, shrink trade deficits and finally help the economy grow faster over a long period of time.

Reasons for balanced budgets
1. Balance budget prevents gigantic debt burdens: Balanced budget is used by all government to prevent gigantic or painful debt burdens.

2. It prevents financial insecurity: Balanced budget does prevent financial security in the company.

3. It helps to control expenditure: Balanced budget is used by government to control financial expenditure.

4. Reduction in interest payment on loans: Balanced budget equally helps to reduce interest on payment of loans.

5. It helps to curb excessive borrowing: Balanced budget equally helps to prevent excessive borrowing by government.

6. It aids or increases savings: Balanced budgets are generally known to increase savings by government.

Meaning of surplus and deficit budgets
1. Surplus Budget: A budget surplus occurs when government spending is less than government revenue in a given period of time. In other words, a budget is called surplus when the total estimated revenue is more than the proposed expenditure. In this kind of budget, not all estimated revenue is proposed to be spent in that year, meaning that there will be reserve.

2. Deficit Budget: A budget deficit occurs when the government spending exceeds government revenue in a given period of time, usually a year. In other words, a budget is called deficit when the government's total proposed expenditure for a period of time is more than the total estimated revenue.

When it refers to federal government spending, a budget deficit is also known as the "national debt".  The opposite of a budget deficit is a budget surplus and when inflows are equal to outflows, the budget is said to be balanced.

Ways of financing deficit budget and their effects
The ways of financing deficit budget include the followings:
1. By a country's bound: Budget deficit is financed by a country's bound. In some countries, it is financed by treasury bills, notes and bonds. This is the government's way of printing money. When more money is pumped into circulation, the supply exceeds the demand.





2. Through public loans made by government: This is the second solution for financing the budget deficit. This is done in order to make up for supplementary expenditure not covered by current revenues.

Effects of Financing deficit budgets
1. Increasing level of prices: The level of prices of goods and services tend to be on the increase as a result of excessive amount of money in circulation.
2. It causes a decrease in the purchasing power of people: Budget deficit causes a reduction in the real income or purchasing power of people.
3. It causes inflation: The emergence of inflation is caused by too much money in circulation chasing few goods and services.
4. It causes depreciation of currency
5. It leads to decrease in social and economic life of citizen.
6. It encourages importation of goods.