Governments spend money in order perform their activities, and the required financial resources to cover government expenditures are obtained through the collection of taxes or by contracting debt. The fiscal balance is the difference between government revenues and spending. If in a given year, a government receives more than it spends, a surplus occurs. Conversely, when the government spends more than it receives in revenues, there is a deficit. Consecutive deficits will lead to mounting debt levels and consequently higher payments of interest. The primary balance that is the balance before interest payments signals the capacity of governments to honour debt without the need for further indebtedness.

General government net saving is the difference between current revenues and current expenditures. In other words, it corresponds to the fiscal balance excluding capital expenditures; therefore it does not take into account investment expenditures or capital transfers (e.g. transfers to rescue financial institutions). More generally, government net saving is typically associated with the Golden Rule concept, namely that government current revenues should, on average, cover current expenditures in the course of an economic cycle. Having consistent negative savings may thus indicate a situation of unsustainable government finances.

The structural or underlying fiscal balance is the difference between government revenues and expenditures corrected by the effects that could be attributed to the economic cycle and one off events. This indicator aims to capture structural trends in order to assess whether the fiscal policy of a country is expansionary, neutral or restrictive for a given period. In fact, government revenues and expenditures are highly sensitive to economic developments. For example, during an economic downturn, cyclical deficits result in lower revenues while at the same time public spending increase as higher unemployment determine additional spending on unemployment benefits. In consequence, eliminating the fluctuations occurred in the economies enable policy makers to identify the underlying trend of fiscal policies that are associated with the sustainability of public finances in the long run.

Governments accumulate debt to finance expenditures above their revenues. As a result of the crisis, many OECD countries raised spending via stimulus packages and interventions to support financial institutions, therefore incurring public debt. In many OECD countries revenue collections also decreased, adding pressure to public finances.

The analysis of the difference between the financial assets and liabilities held by governments (also known as financial net worth or as a broad description of net government debt), gives an extensive measure of the government’s capacity to meet its financial obligations. While the assets reflect a source of additional funding and income available to government, liabilities reflect the debts accumulated by government. Thus, a consistent increase in the government’s financial net worth over time indicates good financial health. Conversely, net worth may be depleted by debts accumulated by government, indicating a worsening of fiscal position and ultimately forcing governments to either cut spending or raise taxes.

Fiscal balance for a given level of government (from national to local) is achieved when expenditures and revenues are balanced. The situation where revenues exceed expenses (positive balance) is called a surplus. On the contrary, a negative balance is called a deficit. While balances are consolidated across all levels of government, depending on the political and administrative structure, central and sub-central governments share different degrees of fiscal sovereignty. For example in federal countries, states have higher autonomy to contract debt and levy taxes. The general government debt (across all levels of government) might be affected by modest changes in debt by a large number of sub-central governments. Liabilities from sub-central governments resulting from the need to finance deficits through borrowing are considered as debt of the sub-central governments. However, the capacity of sub-central governments to incur debt is often limited since they are usually subject to tight fiscal rules.

Revenues raised by governments are used to finance the provision of goods and services and carry out a redistributive role. The main two sources of government revenues are taxes and social contributions. The amount of revenues raised by governments is related to the economic fluctuations associated to the business cycle as well as historical and current policy choices. For example, governments could choose to provide pensions directly, or allow the provision of retirement benefits by private providers. Their decision will affect how much government revenue they need to raise and by which instrument (e.g. taxes or social contributions). While for a certain period of time additional revenue requirements could be financed by acquiring debt, in the long run, revenues and expenditures should be balanced to guarantee the sustainability of public finances.

In 2013, taxes represented the largest share (on average 58.5%) of government revenues across OECD countries, around, one quarter were collected through net social contributions, while the remainder were for grants and other revenues. However, OECD countries finance their public expenditures in different ways. For example, Denmark and Australia are relatively more dependent on taxes (over 80%% of total revenues). In contrast, Japan and Germany relied relatively more on net social contributions (above 37%) while in Mexico and Norway grants and other revenues exceeded 25% of total revenues, in both cases mostly associated with earnings derived from oil resources.

Revenues are collected differently across central, state and local governments as they differ in terms of their ability to levy taxes and collect social contributions. The amount of taxes collected by sub-central governments provides a proxy of their autonomous fiscal capacity, while the volume of the revenue transfers between levels of government can be considered a proxy of the fiscal interdependence. However, revenues include both own-source taxes and shared taxes and for these latter, there is no autonomous fiscal capacity. Limits on sub-central governments’ ability to set their own local tax bases, rates and reliefs reduce their power to generate their own revenue sources and potentially their ability to provide more tailored public goods and services.

Public expenditures have two main objectives: produce and/or pay for the goods and services delivered to citizens and businesses, and redistribute income. In addition, the amount of financial resources spent by governments provides an indication on the size of the public sector. Although government expenditures are usually less flexible than government revenues they are also sensitive to economic developments associated with the business cycle and reflect historical and current political decisions. For example, governments could choose to transfer resources via subsidies and grants or provide support by lowering tax rates to a given economic sector or a group within the society.

The breakdown of governments’ expenditures by function and its evolution over time reflect the main priorities and challenges of governments. Higher debt burden, high and rising unemployment, the impact of ageing population, but also common goals set by regional agreements (such as in OECD-EU countries) on energy, infrastructure and research and development programmes are all reflected in the structure of governments’ expenditures.

Government expenditures go beyond production related expenditures. In a government budget perspective, economic transactions such as gross capital formation, social benefit payments, interest payments generated by the public debt and subsidies are also included determining the total government expenditures. All these transactions together have the advantage of better capturing on what government spends taxpayers’ money and also its ability to stimulate the demand.

Governments are traditionally responsible for the provision of public goods and services (e.g. education and health care) as well as for the redistribution of income (e.g. social benefits and subsidies). Furthermore, the responsibility for financing these tasks is shared between different levels of government. The need to improve the quality and efficiency of government spending has confirmed sub-central governments as important players in the implementation of public policies. Indeed, sub-central governments could be considered better equipped than central governments to obtain information on local needs and better placed to tailor the provision of public services.

Governments have various tools to promote economic growth and societal well-being. Government undertakes long-term investments in public infrastructures as well as research and development that can contribute to balancing the economic cycles, create new jobs and enhance productivity by applying counter-cyclical policies).

Governments use a mix of their own employees, capital and outside contractors to produce goods and services. Production costs are computed as the share of government expenditures dedicated to the production of goods and services. While some governments choose to outsource the production of most goods and services, others produce the goods and services themselves. Outsourcing can take place in two ways. Governments can either purchase goods and services to be used as inputs, or they can pay a non-profit or private entity to provide the goods and services directly to the end user.