Question

A method that requires departments to commence their financial year with nothing in their budget, compelling departments to indicate how funds are spent in order to validate each item that goes into the budget, is known as _________.

1) hedging
2) leveraging
3) short-term financing
4) zero-based budgeting
5) debt financing

Answer 1

The method is called zero-based budgeting, where all expenses must be approved for inclusion in the budget. A budget deficit occurs when government spending exceeds tax collections, leading to borrowing and potential negative economic impacts.

Step-by-step explanation:

The method that requires departments to commence their financial year with nothing in their budget, compelling them to justify each item of expenditure to validate its inclusion in the new budget, is known as zero-based budgeting. This approach differs from other budgeting methods that base the new budget on previous budgets with incremental adjustments for the new fiscal period.

Zero-based budgeting ensures that all expenses must be approved, rather than only changes to the budget, thereby often resulting in a more efficient allocation of resources. In the context of government spending, when a government spends more than it collects in taxes, it results in a budget deficit, necessitating borrowing to cover the shortfall, represented by the equation G - T > 0 ("equation 1"), where 'G' stands for government spending and 'T' for net taxes. Large and sustained government borrowing can reduce financial capital available to private sector firms and lead to trade imbalances and financial crises.