Structural deficit is a macroeconomics term which is sometimes used to describe a situation in which a government’s total expenditures exceed total revenues. This is often viewed as a chronic imbalance in the government budget, usually resulting from committed policies and spending choices which are difficult to modify. In the simplest terms, it shows that the government is living beyond its means, and is paying for current spending by borrowing.
In a typical year, governments control a considerable portion of the economic activity of their nation. The budget process is often complex, as it is intended to reflect the policies of various departments, arms of the legislature, and other parties. If a governments total spending consistently exceeds its total revenues, the situation is referred to as a structural deficit. This is sometimes referred to as a fiscal deficit, or a deficit on the current account.
Structural deficits, by definition, tend to endure through changes in the economy and government policy. This can prove to be a challenge for governments, as revenue from taxation and other sources tends to rise and fall depending on the state of the economy. Changes in government taxation and spending can temporarily reduce a structural deficit, but in most cases the underlying problem will remain.
The long-term result of a structural deficit can be an accumulation of debt. During periods of economic growth, a government can generally use the additional revenue generated to pay down its debts and reduce the size of a structural deficit. However, if government spending continues to outpace revenue even during times of economic growth, the debt burden can grow significantly.
Where a structural deficit and debt become particularly troublesome is when they are combined with inflation. When a government has a large debt burden and is spending more than it is taking in, it may be tempted to increase the money supply in order to cover its bills. This can lead to increased prices, higher interest rates, and overall economic deterioration.
Attempts to reduce a structural deficit are often complex, and will usually involve a mixture of policy changes. In some cases, a government may opt to increase taxes or cut spending in order to reduce their expenditures and bring them in line with revenues. Other governments may be more creative, instituting changes in long-term fiscal policy to ensure that ongoing spending commitments are under control and do not lead to deficits in subsequent years.
No matter what approach is taken, it can often be difficult to convincingly measure the impact of policy changes intended to reduce structural deficits. Additionally, the turnover of government bodies during each election cycle can also mean that important initiatives are easily forgotten. Considerable discipline and vigilance is often required by governments to ensure that long-term trends are taken into account and acted upon.
In summary, structural deficit refers to a situation in which a government’s total expenditures consistently outpace total revenues. This creates an imbalance in the budget, and can result in an ever-increasing accumulation of debt. Considering the significant economic consequences of large-scale deficits and debt, it is important for governments to get a handle on their fiscal situation and develop policies that bring spending and revenue into balance.
