The structural deficit is a long-term government deficit caused by spending more than tax revenues can bring, while the cyclical deficit is dependent on the business cycle. The structural deficit is considered more serious as it implies unsustainable spending. Keynesian economics advocates assuming a cyclical deficit to speed up recovery from a recession, but a high structural deficit is generally not desirable. Investment justifies taking on the structural deficit, but it remains a contentious issue in US politics.
The structural deficit is a government deficit independent of the business cycle, which remains even when an economy is at its full potential. This is created when a government is spending more than a long-term average of tax revenues can bring. The component of the budget that depends on the ups and downs of the business cycle is called the cyclical deficit. Economists generally argue that the structural deficit is much more serious than the cyclical deficit, as it implies unsustainable spending.
A deficit results when a government’s tax revenues do not fully cover its expenditures. During a recession, the cyclical component of the deficit usually increases for several reasons. First, a recession means that a country’s net income has fallen below potential, so the amount of taxable income will be below average. Second, governments tend to cut tax rates during recessions to stimulate the economy. Third, spending on social programs like welfare, Medicaid, and food stamps also tends to increase during a recession.
Keynesian economics, an influential economic theory, advocates assuming a cyclical deficit when it could speed recovery from a recession. The assumption of a high structural deficit, however, is generally not considered a desirable strategy because it remains even when the economy is at full employment. Full employment is never actually achieved in a real country, but it can be useful in an economic model to demonstrate the upper bound of a population’s income generating potential.
The investment is a justification for taking on the structural deficit. Countries invest in their future in much the same way as individuals. If the return on an investment is deemed worth incurring the required amount of debt, governments borrow money and shoulder the structural deficit. A common example of this is investment in infrastructure, such as roads and railways. While these designs are expensive, they create jobs and can be used for many years.
The structural deficit of the United States (US), for example, has increased substantially in recent decades and is a contentious issue in US politics. Politicians rarely agree on whether or not a particular initiative is worth taking on long-term debt. On the one hand, some investments can increase security and prosperity in future years. On the other hand, future taxpayers will face debts and interest expenses arising from the structural deficit. While running this type of deficit may make sense in some situations, such as an impending national security crisis, it is generally cautioned by economists.
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