Public finances explained

Writing about 'Crisis batters UK public sector revenues' in the Financial Times:

The Government gets its money from tax. So, when companies are making lots of money and when everyone has a job and is spending lots in the shops, the Government gets lots of money is corporate tax, income tax and VAT; it takes this money and spends it on public services from education through welfare to defense to name just a few.

When companies are doing badly, and when people are losing their jobs and not spending money in the shops, the Government collects less money in tax.

Current spending plans (i.e. what the Government has planned to spend its money on), were based on the belief that the economy would continue to be good. It has not.

This means that Government can no longer afford to buy the things it wanted to buy. This doesn't just mean that services may be cut to the individual citizen, it also means that, if the Government tries to make savings by sacking people who work in the public sector, then consumer confidence will further weaken and the economy will become even weaker - a vicious circle.

One way of avoiding this vicious circle is to borrow; the Government can borrow money to maintain public spending in the bad times and pay off this debt in the good times.

The problem we are now facing is that the sheer scale of the recession, and the level of borrowing that the Government has already engaged in to bale out failed banks, means that we can't borrow our way through the recession and that there is no guarantee that the economy will be recover to be anywhere near as strong as it has been for many, many years to come.