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What Is Structural Deficit?

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  • Written By: James Doehring
  • Edited By: Jenn Walker
  • Last Modified Date: 16 April 2014
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Structural deficit is a government deficit that is independent of the business cycle—it 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 revenue can bring in. The component of the budget that does depend on the ebbs and flows of the business cycle is called cyclical deficit. Economists generally maintain that structural deficit is much more serious than cyclical deficit, as it implies unsustainable spending.

Deficit results when a government’s tax revenue does not fully cover its expenditures. During a recession, the cyclical component of deficit usually increases for several reasons. First, a recession means that the net income of a country has fallen below potential so the amount of taxable income will be lower than average. Second, governments tend to cut tax rates during recessions to stimulate the economy. Third, spending on social programs such as welfare, Medicaid, and food stamps also tends to increase during a recession.

Keynesian economics, an influential economic theory, advocates taking on cyclical deficit when it might speed up recovery from a recession. Taking on high structural deficit, however, is not generally considered to be 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 limit of a population’s revenue-generating potential.

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Investment is one justification for taking on structural deficit. Countries invest in their own futures in much the same way individuals do. If the payoff of an investment is deemed to be worth incurring the required amount of debt, then governments borrow money and take on structural deficit. A common example of this is investment in infrastructure, such as roads and railways. While these projects 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 past decades and is a controversial issue in US politics. Politicians seldom agree on whether or not a particular initiative is worth incurring long-term debt. On the one hand, certain investments may increase security and prosperity in future years. On the other hand, future taxpayers will be faced with debt and interest charges resulting from structural deficit. While incurring this type of deficit may make sense in some situations, such as an imminent national security crisis, it is generally cautioned against by economists.

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Discuss this Article

hamje32
Post 4

@allenJo - It’s not the middle class alone who need the tax rates cut. It’s the rich – in other words, the people who create jobs. Yes, those rich people; we are interested in creating jobs and reducing the public deficit aren’t we? Then we have to give businesses every incentive to hire.

So while I understand that it doesn’t sound politically expedient to say that we are cutting taxes for the rich, the harsh reality is that they are the job creators (for the most part) and we need to give them every incentive to create those jobs.

allenJo
Post 3

@Mammmood - I think you’re cutting off your nose to spite your face. If you cut tax rates and cut government spending, then you have less money to help those who are suffering in the distressed economy.

The last thing we should be doing is cutting back on Medicaire, food stamps or unemployment insurance for the people who actually need these programs.

We should scale back tax rates for middle class earners while ensuring the wealthy can help to subsidize the public programs.

Mammmood
Post 2

@miriam98 - The federal deficit is far worse than the cyclical deficit, and I don’t even think your basic assumptions are correct about infrastructure spending.

I don’t think it’s a good idea to begin with, not because of inefficiencies, but because it simply adds more debt to the existing debt. It takes a bad situation and makes it worse, all for short term, incremental gains.

The tradeoff is not worth it, in my opinion. The Bush deficit was made worse by additional deficit spending, and that has made foreign investors leery of buying up treasury bonds.

Thus, I think that the only permanent cure is drastic cuts in taxes rates and in government spending. This is what stimulates the economy, when the private sector can sense that it will not be unduly restrained by government rules and regulations.

miriam98
Post 1

I think politicians on both sides of the aisle agree that infrastructure investment spending is a good idea. The only problem is that governments tend to be bureaucratic and inefficient in their investments in this regard.

Either they will resort to “stimulus” spending where the stimulus funds actually get redirected elsewhere, like in bolstering state budget shortfalls. Or they will take too long to execute their initiatives on the infrastructure upgrades, so that by the time they get to actually doing anything, the economy has rebounded on its own.

Governments seldom move as quickly or as efficiently as the private sector in my opinion.

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