Which statement about the government budget constraint is accurate?

• A. The government can only finance deficits by taxes; debt issuance and money creation are not allowed.
• B. The government must finance expenditures with taxes, debt issuance, or money creation; deficits raise the debt; the constraint links revenue, spending, and debt.
• C. Debt issuance has no effect on future budgets.
• D. Money creation is not a valid financing option.

Answer: (B)

The government budget constraint shows how spending is financed: a government must cover its expenditures with tax revenue plus any financing choices, such as issuing new debt or creating money. When spending exceeds revenue, the shortfall must be financed through debt or money creation, which means the outstanding debt rises. That debt then creates future obligations—interest payments and eventual repayment—so today's deficits influence future budgets. Money creation is a financing option in many frameworks, though it carries inflationary risks and monetary policy implications.

So, the statement that spending can be financed by taxes, debt issuance, or money creation, and that deficits raise the debt and connect revenue, spending, and debt, is the accurate description of the budget constraint. The other ideas omit a financing source, claim debt has no effect on future budgets, or deny money creation as an option, all of which misstate how the constraint works.