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.
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.
