Question

The table below reflects the actual and structural budget deficit as a percentage of GDP.

Year	Actual Defect	Structural Deficit
	As % of GDP	As % of GDP
2010	2.8	2.9
2011	3.9	3.2
2012	4.6	3.4
2013	4.7	3.7
2014	3.9	3.7
2015	3.00	2.8
2016	2.3	2.6
2017	1.4	1.6
2018	0.3	1.0

a. Graph the above data with “years” in the horizontal axis, and “deficit as % of GDP” in vertical axis.

b. From 2010 to 2014 the actual budget deficit is above the structural budget deficit. Explain why.

c. From 2016 to 2018 the actual budget deficit is below the structural budget deficit. Explain why.

d. Which period was the fiscal policy contractionary?

e. Which period was the fiscal policy expansionary?

Answer 1

Solution ::

a) Following is the line graph from the above data with "deficit as % of GDP" on horizonatal axis and "years" on vertical axis.

Key points to keep in mind

Budget Deficit

Any shortage in monetary terms is known as deficit. When the total expenditure by the government is more than the government revenue for a period of time, it is known as budget deficit.

Actual Budget

A budget is an estimation made by the finance ministry of a government to have an idea of the future revenues and expenditures for a particular financial year. There can be variance in the estimated amount and the actual amount.

Structural Budget

The structural budget focuses on governement spending and the tax regime followed by the government. The structural budget represents the tax rates decided by the government during a period, expenditure on defence and other fiscal policies. When there is a deficit in the structural budget it means there is a discrepancy within the government revenues and expenditure due to the fiscal policy followed during that particular period.  

Fiscal Policy

Fiscal policy determines the ability to utilize the revenues earned by the government appropriately and spend those revenues on various expenditure in order to have an impact on the economy. The fiscal policy has a great influence on the growth of the economy of a particular country.

b) Why the actual budget deficit is above the structural budget deficit from 2010 to 2014?

The reason why the actual budget deficit is above the structuaral budget deficit can be because the tax rates by the government might have been increased during the period 2010-2014. From 2010-2014 the government spending or the government expenditure might have also been reduced, resulting in a hike in the actual budget deficit.

c) Why the actual budget deficit is below the structural budget deficit from 2016 to 2018?

The reason why the actual budget deficit is below the structural budget deficit can be because the tax rates decided by the government might have gone down during the period 2016-2018. From 2016-2018 there might have been an increase in the government expenditure therefore resulting in an escalation in the structural budget deficit.

d) Which period was the fiscal policy contractionary?

From the data given in the question and from the graph we can understand that during the period between the years 2010 and 2014, the actual budget deficit is above the structural budget deficit. This implies that during this period the fiscal policy that was being followed reduced the government expenditure as well as increased the rates of taxes during the years 2010,2011,2012,2013 and 2014, thus resulting in a contraction of the fiscal policy that was being followed by the government.

e) Which period was the fiscal policy expansionary?

In contrary to the period from 2010 to 2014, during the period between the years 2016-2018 the actual budget deficit is below the structural budget deficit. This depicts that during this period the fiscal policy that was being followed increased the government expenditure as well as decreased the rates of taxes during the years 2016,2017 and 2018, thus resulting in an expansion of the fiscal policy that was being followed by the government.

Additional information : Fiscal neutrality is when the fiscal policy is neither contractinary nor expansionary. This is obtained when the government expenditure is equal to the tax rates under the current fiscal policy.