University:
London School of Economics and Political Science
Course:
L400 | International Social and Public Policy
Academic year:

2024
Views:

457

Pages:

2
Author:

Prerna T

Structural vs Cyclical Deficits lust like we had structural and cyclical unemployment, we can also think of structural and cyclical deficits As we have learnt, budget deficits have a large cyclical clement, they tend to rise when growth is weak and fall when growth is strong. The cyclical budget deficit is the part that changes with the business cycle. The structural budget deficit is what is left when the cyclical element is taken away For example: A country with a balanced budget thet runs a delicit for a few years after a financial crisis before returning to a balanced budget would have had a cyclical deficit. A country running continuous 5% deficits, even when growth is strong has a structural deficit. A country running a 5% deficit continuously, that gets hit by a recession and is now running a 95% deficit would be said to have a 55% structural deficit, and a 4% cyclical deficit. But how much of a budget deficit is cyclical and how much is structural? it may help you to understand by looking at the chart below. The cyclical and structural deficits are marked in different colours. Note that this chart is shows a deficit above the zero line and a surplus below. 10 Cyclical deficit Structural defici Publle sector net botrowing malof GOP Sovito ONL CH 1975-76 1979-80 1903-04 1087-86 1901-02 1005-06 1999.00. 2003-04 2007-08 2011-12 2015-16 2019-20 Many economists belleve that governments should try to avold structural budget deficits. These are not related to the state of the economy and suggest that a government is overspending, You can sec in the chart above however that governments are not very good at avoiding structural deficits! Other economists believe that a structural budget deficit is acceptable if it is due to greater spending on investment (e.g. health, education, infrastructure) as this will improve potential economic growth over time and ensure stronger economic growth (thereby lowering deficits in the future). Brainstorm with a partner!