![]() Therefore, it changes according to the current cycle. On the other hand, cyclical deficits are closely related to the current business cycle. But, on the other hand, it also results in more retirees, leading to a bigger spending budget for them. It lowers the income tax paid on labor income. As the aging population is less productive, it causes a decrease in output and income in the economy. In addition, the structural deficit can also be influenced by long-term structural factors such as an aging population. However, the deficit could occur due to changes in the government’s policy stance. So, the economic cycle does not affect it. It can persist even as the economy expands or is at full employment. Structural deficits are unrelated to economic conditions. The budget deficit is broadly divided into two categories: What is the difference between a cyclical and structural budget deficit? This situation can jeopardize fiscal sustainability and raise problems such as: Debt accumulates when the structural deficit continues to increase from year to year. Then another reason why structural deficits are important is that they affect government debt in the long run. Long story short, the structural deficit increased, although, at the same time, the cyclical deficit also increased. In the case above, if the increase in the total deficit is greater than the difference between the tax reduction and unemployment benefits, the government is likely to adopt an expansionary policy stance. To distinguish whether the increase in the deficit is due to economic conditions or changes in the government’s policy stance, we can examine the structural budget deficit. In this case, the government took an expansionary fiscal policy stance. Meanwhile, an increase in the deficit can also occur because the government is deliberately doing it to get the economy out of recession. This is the reason why economic conditions can lead to an increase in the deficit even when the government does not change its fiscal policy stance. Thus, the government’s budget deficit in this period tends to increase as government revenue decreases while expenditure increases. On the other hand, unemployment benefits increase due to an increase in the unemployment rate. Two examples are taxes and unemployment benefits.ĭuring a recession, tax revenues tend to decline as the prospects for business profits and household incomes deteriorate. Why?Īn increase in the deficit can occur for two reasons:Īs we learned in macroeconomics, some items in the government budget are counter-cyclical. However, if we focus solely on increasing the government’s deficit and we conclude the government is pursuing an expansionary fiscal policy, our conclusions can be misleading. I mean, the change in the deficit reflects a deliberate change by the government to affect the economy.įor example, during a difficult economy such as a recession, the government usually increases the deficit to stimulate economic growth. Why is the structural budget deficit important?Įxamining the structural budget deficit is important to reveal the government’s fiscal policy stance. And the situation could lead to higher fiscal risk, increased default rates, and lower sovereign ratings. As it increases over time, the debt becomes increasingly piled up. ![]() So, there are times, such as during a recession, when the government’s budget deficit increases not due to an increase in the structural deficit but from a cyclical increase in the deficit.īecause it is unaffected by the business cycle, the fiscal deficit is a major factor in government debt in the long term. The structural deficit plus the cyclical deficit represent the total budget deficit. On the other hand, if the structural deficit declines, the government may try to curb inflation or adopt contractionary fiscal policies. If the structural deficit increases, it indicates the government is deliberately pursuing an expansionary fiscal policy to stimulate economic growth. Economists look to changes in the structural deficit to indicate the government’s fiscal stance. ![]()
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