Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is a primary cause of a government budget deficit?

1. Government expenditure is equal to income receipts

2. Government borrowing exceeds repayment obligations

3. Government expenditure is higher than income receipts

4. Government income is primarily from donations

The correct answer is: Government expenditure is higher than income receipts

A primary cause of a government budget deficit occurs when government expenditure exceeds income receipts. When a government spends more money than it collects through various revenue sources, such as taxes, it faces a budget deficit. This imbalance leads to the need for the government to finance its activities through borrowing or other means, accumulating debt over time. The focus is on the relationship between spending and income, where consistent overspending relative to income receipts will contribute to ongoing budgetary challenges and financial instability. Hence, when expenditures surpass the inflows from revenues, the government is unable to maintain a balanced budget, leading to a deficit. Understanding this relationship is crucial for policymakers as it provides insight into fiscal sustainability and the challenges that may arise from persistent deficits, including the potential for increased borrowing costs and future financial constraints.