Chapter 11: Problem 8

Why do government budget deficits grow during recessions?

Short Answer

Expert verified

During recessions, government budget deficits grow due to a combination of factors: decreased revenues and increased expenditures. As economic activity slows down and unemployment rises, tax revenues decrease. Meanwhile, the government may increase spending on infrastructure projects, unemployment benefits, and social programs to stimulate economic growth and support those affected by the recession. The increased spending, coupled with the reduced revenues, ultimately results in the growth of budget deficits during recessions.

Step by step solution

Define Government Budget Deficit

A government budget deficit occurs when a government's expenditures (the money it spends) exceed its revenues (the money it receives, mainly through taxes). A deficit can result from a combination of increased spending and/or decreased revenue.

Define Recession

A recession is a period of negative economic growth, typically characterized by a decline in employment, investment, corporate profits, and consumer spending. Recessions usually last for a few quarters and can have a significant impact on the overall economy.

Explain the Relationship Between Government Budget and Revenue

The government's revenues are primarily generated through taxes, such as income tax, corporate tax, and sales tax. When the economy is doing well, and businesses are growing, more people are employed, and consumers are spending money, tax revenues increase. Conversely, during a recession, fewer people work, and consumer spending decreases, resulting in fewer tax revenues for the government.

Explain the Relationship Between Government Budget and Expenditures

During a recession, the government may increase its expenditures to stimulate economic growth. This can be done through a variety of means, including infrastructure projects, unemployment benefits, and other social programs aimed at assisting those affected by the recession. This increased spending can help to boost demand and support economic recovery, but it also contributes to the growth of the budget deficit.

Describe How Recessions Cause Deficits to Grow

In summary, during a recession, the government budget deficit grows due to a combination of decreased revenues and increased expenditures. As economic activity slows down and fewer people are employed, tax revenues decrease. At the same time, the government may increase its spending to stimulate economic growth, support affected individuals, and protect businesses. This increased spending, coupled with reduced revenues, causes the budget deficit to grow during recessions.