Structural deficit

From Hobson's Choice

Given a fixed tax code, fixed entitlement policies, and a roughly stable rate of direct government purchases of goods & services (G), a recession will cause tax revenues to fall and government expenditures to rise. This creates a deficit (or reduces the surplus, if there was one). Conversely, if the economy is in recovery, tax revenues rise and expenditures fall, causing the budget deficit to shrink or even move to a surplus.

An incoming administration has no control over the business cycle, and has little (if any) control over the duration of its tenure. Rhetoric aside, changes to the tax code or favorable trade agreements have effects over only long periods of time. So an administration that comes to office at the beginning of a recession may defend its deficit spending by pointing out that the state is structurally in balance; i.e., the inevitable recovery will bring with it a return to fiscal balance. The point is not trivial; if the deficit is structural, then money markets will have to assume that the state's growing debts will lead both to a higher demand for credit, and higher tax rates further off in the future.

Those interested in the so-called "Ricardian Equivalence Hypothesis" of Robert Barro, please note that one study of the historical evidence established a split between the structural and non-structural elements of deficits: non-structural deficits don't stimulate increased saving.

James R MacLean (13:04, 23 September 2007 (PDT))