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What is Fiscal Balance?

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  • Written By: Laura Metz
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 12 November 2016
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Fiscal balance refers to the point at which a country's income and its expenditures are equal. Governments receive money through tax and non-tax revenue and spend money for mandatory and discretionary expenses. Many people are involved in analyzing a fiscal balance, although fiscal policy is decided in different ways throughout the world.

Taxes are the primary source of income for most governments. Governments often require income tax, sales tax, and property tax, as well as taxes on imports and exports. Although necessities, such as food and medicine, are rarely taxed, most nations do levy luxury taxes on products that are not considered essential, such as extremely expensive cars and jewelry. Items that the government wishes to discourage consumers from buying, such as alcohol and tobacco, often have a luxury tax as well.

Non-tax revenue refers to any government income that does not come from taxes. This can include profits from any state-owned companies, investment funds, or sales of government property and assets. Fines and fees for things such as licenses, passports, or the use of toll roads are also non-tax revenue. In most situations, police tickets support the local police station and do not contribute to a country’s non-tax revenue.

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Governments spend money on many things, including salaries, upkeep of government property, military expenses, social programs, and both domestic and foreign emergency aid. Mandatory expenditures are those expenses that are required by law. In the United States, for example, the government is required to make social security payments to qualifying citizens. Discretionary spending refers to everything else, such as road construction.

When a country spends less money than it earns that year, it has what is known as a fiscal surplus because there is unused money at the end of the year. Fiscal deficit occurs when a government spends more than it earns. For most countries, a fiscal deficit is far more common, and the government is in debt.

Many full time employees spend their days analyzing a fiscal balance. For example, the U.S. fiscal plan is created by Congress and the president. In addition, the seven members of the Board of Governors of the Federal Reserve are charged with monitoring the nation’s fiscal balance in conjunction with Congress and the Secretary of the Treasury.

Countries within the eurozone must make their fiscal policy together. Although each country has its own income and expenditures, their fiscal plans are connected because they all use the same currency. If one country were to print too many euro, the inflation would trouble every eurozone country. Eurozone nations must work together to achieve fiscal balance.

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