Question

Critical Thinking: Nebraska is required to balance its state budget. The primary internal sources of revenue for Nebraska are income tax and sales tax. Externally, Nebraska, like all states, also receives a block grant from the Federal Government, but this might end. If the country goes into a recession and people both earn and spend less money, the state will receive less revenue. How can the state then maintain a balanced budget?

Answer 1

A balanced budget refers to a budget wherein revenues are equivalent to expenditures. During balanced budget, the government does not indulge in wasteful expenditure. In a balanced budget, Aggregate demand gets unaffected. AD is expected to rise. However, when an economy is driven to the state of recession and involuntary unemployment, the government needs to make a plan for deficit. Depression is that phase of economic activity when the level of investment is low owing to the low level of AD. The government is expected to increase its expenditure with a view to increase Aggregate demand. Deficit budget acts as a key instrument to correct state of depression. To maintain balanced budget, the state needs to follow the below key points:

1. Deficit financing is a very convenient means of raising funds to cope with budgetary deficit to come up to a level of balanced budget.

2. Public borrowings: The government may raise loans from the general public by issuing bonds of various types.