Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits.
This expenditure can be funded in a number of different ways:
Taxation
Seignorage, the benefit from printing money
Borrowing money from the population, resulting in a fiscal deficit.
Consumption of fiscal reserves.
Sale of assets (e.g., land).
[edit] Funding the deficit
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may default on its debts, usually to foreign creditors.
[edit] Consuming the surplus
A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring a deficit.
This expenditure can be funded in a number of different ways:
Taxation
Seignorage, the benefit from printing money
Borrowing money from the population, resulting in a fiscal deficit.
Consumption of fiscal reserves.
Sale of assets (e.g., land).
[edit] Funding the deficit
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may default on its debts, usually to foreign creditors.
[edit] Consuming the surplus
A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring a deficit.
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