Economics, 3rd Edition

Structural and Cyclical Deficits

The focus on public sector deficits raises questions about the difference between cyclical and structural 

deficits. As we have seen, a cyclical deficit occurs when government spending and income is disrupted 

by the ‘normal’ economic cycle. In times of strong economic growth government revenue from taxes 

will rise and spending on welfare and benefits will fall and so public finances will move into surplus (or 

the deficit shrinks appreciably). In times of economic slowdown the opposite occurs and the size of the 

budget deficit will rise (or the surplus shrinks). A structural deficit refers to a situation where the deficit is 

not dependent on movements in the economic cycle but indicate that a government is ‘living beyond its 

means’ – spending what it has not got.

Economists are divided in their views about the nature and importance of structural deficits. What 

 follows is a summary of the arguments on both sides.

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798  PART 15  INTERNATIONAL MACROECONOMICS