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Revenues
.
Expenditure must be financed, and the government must have income. Most 
government income comes from 
taxation
, although some income is obtained from 
direct charges 
to users of government services, such as National Health Service charges. 
A third element of the fiscal policy is: 
(c) 
Borrowing
.
To the extent that a government's expenditure exceeds its income it must borrow to 
make up the difference. The amount that the Government must borrow each year is now known 
as the 
Public Sector Net Cash Requirement (PSNCR)
in the UK. Its former name was 
Public 
Sector Borrowing Requirement (PSBR)
. Where the Government borrows from has an impact on 
the effectiveness of fiscal policy.
9.2 Budget surplus and budget deficit 
If a government decides to use fiscal policy to influence demand in the economy, it can choose either 
expenditure changes or tax changes as its policy instrument.
Suppose, for example, that the Government wants to stimulate demand in the economy. 
If the Government kept its own spending at the same level, but 
reduced levels of taxation
, it would 
stimulate demand
in the economy because firms and households would have more of their own money 
after tax for consumption or saving/investing. 
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CHAPTER 3
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THE MACROECONOMIC ENVIRONMENT 
 
75 
(a) 
It can increase demand directly by spending more itself
 – 
eg on the health service or education, 
and by employing more people itself. 
(i) 
This extra spending could be financed by higher taxes, but this would reduce spending by 
the private sector of the economy because the private sector's after-tax income would be 
lower. 
(ii) 
The extra government spending could also be financed by extra government borrowing. 
Just as individuals can borrow money for spending, so too can a government. 
(b)