Economics, 3rd Edition

Argument 1: Policymakers Need to Eradicate Structural Deficits 

The existence of a structural deficit 

implies that the public finances will be even worse when entering a recession, necessitating increasing levels 

of borrowing which is unsustainable in the long term. Cyclical effects will merely serve to make the deficit 

worse. This was seen in examples of European government deficits in 2010 – some of the largest deficits in 

peacetime history and created in part by governments committing to spending too much in the ‘good times’.

As a result of the size of these deficits, the risk of default by governments on their debt is greater; 

increasingly they will find it difficult to service their debt and the cost of so doing will rise. This also  creates 

uncertainty in financial markets and threatens the survival of the euro. As a result fiscal consolidation 

is essential to reduce long-term interest rates and currency instability and help to promote economic 

growth. This fiscal consolidation should primarily be in the form of cuts in public spending rather than 

increases in taxes which may damage employment and investment.