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1
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2
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- Actual Deficit or Surplus
- Difference between government spending (G) and tax revenue (T) for a
fiscal year.
- If G > T, a deficit exists.
If T > G, a surplus exists
- A deficit does not necessarily indicate that too much is being spent,
since tax revenue changes automatically with the state of the economy
and the size of the economy (economic growth).
- A deficit can result from economic weakness (tax revenues fall with a
weak economy and entitlement spending like Unemployment Insurance
rises)
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3
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- Structural Surplus/Deficit – the budget with business cycle effects
removed
- A hypothetical measure to gauge how much fiscal policy will influence
the economy after extracting the effects of the current state of the
economy
- Compare current government spending (G) with what tax revenues (T)
would be at full employment (even if not there now). The difference
between these is the structural surplus (if T > G) or deficit (if G
> T)
- Fiscal policy is expansionary when there is a structural deficit (not
necessarily with an actual deficit)
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4
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- Cyclical Surplus/Deficit – effect of the state of the economy
- The difference between actual deficit or surplus and the structural
deficit or surplus
- This is influenced by current levels of economic activity
- In “bad” times – (real) tax revenues fall, and entitlement spending
rises (both are keyed to the state of the economy), resulting in
cyclical deficits
- The opposite occurred during the end of the last recovery, when the
economy was stronger
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5
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- Fiscal Dividend – the benefits of growth
- Economic growth increases both employment and income, and, with an income tax system, this automatically
produces more tax revenue. The added tax revenue resulting from
economic growth is fiscal dividend
- The more rapid is economic growth, the greater is fiscal dividend,
allowing more spending to be “affordable”
- Rhode Island is a lagging economy, so its fiscal dividend is not as
great as it would be with more rapid growth. This has made a number of
desirable spending items “unaffordable”
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6
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- Economic growth is related to the types of spending that a state economy
engages in. A critical dichotomy exists:
- Consumption oriented: spending that does not enhance future production
or income directly
- Investment oriented: contributes directly to production, income, and
infrastructure (ex: educational spending for human capital)
- The greater is investment-oriented spending, the more rapid is economic
growth
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7
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Notes
