Public budget and fiscal policy

The budget is the government's annual financial plan: receipts on one side, expenditure on the other, and the deficit between them. Fiscal policy uses spending, taxation and borrowing to stabilise the economy and pursue equity and growth. Worked example: with MPC 0.8, a 100 rise in government spending raises income by 500 through the multiplier; but if taxes rise by 100 at the same time (a balanced budget change), income still rises by 100 — the balanced budget multiplier is 1, because the spending multiplier (5) exceeds the tax multiplier (4) by exactly one.