Public Finance
Spring 2025/2026
Lecturer : Professor Dr. Azza Hegazy
1
Public Finance and the Market Economy
Lecture Notes
(BIS)
Dr. Eman Hassan Ali
Professor of Economics
Dr. Asmaa M. Hussein Dr. Rasha M. El-Akkad
Associate professor of Economics Associate professor of Economics
Department of Economics and Foreign Trade
Faculty of Commerce & Business Administration
Capital University 2025/2026
2
Chapter Eight
Government Debt
3
1-Introduction:
▪ A government's budget balance is determined by the difference in
revenues and spending.
▪ A positive balance is a surplus, and a negative balance is a deficit.
2- Types of deficit:
2.1. Cyclical Deficits
At the lowest point in the business cycle (Trough), the unemployment is
very high. This means that tax revenues are low and expenditures (e.g.,
on social security and unemployment benefits) are high, leading to a
budget deficit.
4
Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue
and decreasing spending, which leads to a budget surplus.
Thus, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of
the cycle.
5
Role of fiscal policy through business cycle:
Deficit during recession → use expansionary tools. (Goal: Stimulate aggregate demand,
reduce unemployment.)
▪ Increase government spending (Direct spending on infrastructure, education, defense, or
public services to boost demand and employment)
▪ Reduce taxes to increase private spending.
▪ Increase Transfer payments as unemployment benefits, welfare, or subsidies to support
household income and consumption.
▪ Increase Public investment: Accelerate capital projects (roads, bridges, green energy) to create
jobs and multiplier effects.
▪ Deficit financing: Borrowing (issuing government bonds) to cover the gap without raising
6
taxes.
Surpluses during expansion and Boom (Goal: Cool down the economy,
prevent overheating and inflation.)
▪ Reduce government spending: Cut back on discretionary spending (e.g., delay
infrastructure projects, freeze hiring).
▪ Increase Taxes: increases income tax, corporate tax, or consumption tax to
reduce private sector demand.
▪ Reduce transfer payments
▪ Surplus accumulation Use surplus to repay public debt or save in sovereign
wealth funds (if persistent).
7
2. Structural Deficits
The structural deficit is the deficit that remains across the business cycle because
the general level of government spending exceeds prevailing tax levels.
Role of fiscal policy in Structural Deficits: Use permanent tools
1-Expenditure-Based Tools: focus on reducing permanent government
expenditure
• Entitlement Reform: benefit retirement ages for programs like pensions,
healthcare, and social security.)
• Subsidy Rationalization: Phasing out inefficient or regressive subsidies (e.g.,
fuel, agricultural) that create permanent fiscal drains. 8
2. Revenue-Based Tools: focus on increasing the government’s
structural revenue base.
• Tax Base Broadening
• Tax Rate Adjustment: Permanently raising rates on income,
consumption (VAT), or corporate profits.
• Introducing New Taxes: Implementing recurrent taxes on
property, wealth, carbon.
3-Institutional & Rule-Based Tools
These are governance mechanisms to enforce structural
discipline. (ex: Fiscal Responsibility Laws)
9
4- Public Financial Management Tools
These improve efficiency to reduce the structural need for borrowing.
3- Government budget deficit; a means of finance:
Governments can spend more than they collect from taxes and other
sources of revenue by borrowing.
➢ By running up the public debt, governments can put off the burden
of taxation to the future. The greater portions of future tax revenue
will be used to pay interest on debt instead of being used to provide
government services.
This is efficient because taxes will then be distributed among future
generations who will share the benefits of such government
investments as roads, structures, transportation, communication 10
networks, and environmental protection.
➢ The deficits also can reduce living standards of future generations by
contributing to reduced industrial investment and lower economic
growth.
➢ A government budget deficit adds to the national debt by increasing
the future interest costs. Therefore, each year more tax revenues
must be devoted to paying interest on the national debt instead of
providing goods and services to citizens. Moreover, higher interest
rates may discourage private investment, thereby slowing the real
rate of economic growth for the nation.
11
Thank You
12