Methods of Financing a Deficit or Utilising a Surplus

Question 1

Financing a Deficit

Answer 1

When the government expenses government revenues the budget is in deficit and the government must pay for it (finance)

Financing = borrowing
The government borrows by selling bonds

Question 2

Bond

Answer 2

A bond is an ‘I owe you’
- The government sells bonds to fund/finance its deficits
- The investor who buys the bond from the government receives interest and their money back at a certain date.

Question 3

Selling Bonds

Answer 3

The government could sell bonds to:
- Local investors
- Overseas investors
- The RBA

Question 4

Utilising a Surplus

Answer 4

• All of the government’s debt is through the issuance of bonds.
• To pay off or pay down debt it must use surplus $ to pay back bondholders

Question 5

Saving with the RBA

Answer 5

Theoretically, the government could save money in an account at the RBA where they would earn interest at the cash rate.