hi there this is a short video on an aspect of macroeconomics and we're going to take a look at the difference between a cyclical and a structural budget deficit now this is specifically on the aqa syllabus but also on the nxl syllabus as well so it's an important one to understand at a macro level so a budget deficit of course is when the government is spending more than it's taking in in tax and therefore the government has to borrow to to fund it or finance a deficit in most countries there are multiple causes of fiscal deficits some of them are cyclical some of them are structural so typically during a recession for example when unemployment's going up the tax base of the economy tends to shrink there are fewer people in work paying income tax than national insurance and also if consumer spending is falling often the root cause of a recession companies are making less profit therefore they pay less in corporation tax consumers are spending less so therefore vat receipts tend to diminish so fall in consumption could also depress tax revenues and lead to a rising deficit and if there's an increase in inactivity in activities people uh who are out of out of employment but not necessarily counted as unemployed so perhaps people who've taken early retirement or people who are not not working full-time or part-time because they can't can't find a job or there's some sort of disincentive stopping them taking work when econ like economic inactivity goes up if they're more worthless households for example that puts extra pressure on the welfare benefit levels although benefits are now capped but there would be an increase in universal credit it may be the case that the deficit goes up for a deliberate reason where the government decides to inject a fiscal stimulus into the economy either through an increase in public sector pay or perhaps an increase in investment spending even at a fall and direct tax so there will be a short-term increase in the fiscal deficit because of a fiscal stimulus and the deficit might also go up if the government ends up paying more interest on its debt typically in a given year the uk government spends somewhere between 40 and 45 billion pounds a year on debt interest so if the yield on the government bond goes up then the government will have to pay more in interest on its existing debt the debt service cost goes up adding to the fiscal deficit and equally there can also be some demographic factors this is one of the structural factors affecting the budget position of the government so for example the aging population causes the the total amount the government spends on the state the basic state pension to to go up there could also be a structural policy in place for example the triple lock where pensions rise by a minimum amount inflation or two and a half percent or the growth of average earnings whichever is the higher so there could be some structural population factors affecting the size of the deficit so in a nutshell how do we distinguish between a cyclical and a structural deficit well the cyclical physical balance the cyclical budget balance uh explains a situation where the size of a country's government's deficit is influenced as affected by where the economy is in its cycle so during the boom times tax revenues from from companies and people are relatively high spending on unemployment benefit and other welfare benefits tends to be low therefore the cyclical balance you'd expect to be pretty good indeed the government may run a surplus because of the strength of the economy the structural fiscal balance is i think from our point of view of our video tonight the most important bit so the structural budget of fiscal balance is that part of the deficit which is not related not related to where the economy is in the cycle it's the part of the deficit which will not disappear if and when an economy recovers so hopefully you see the difference between the cyclical and the structural deficit structural deficit makes an adjustment for where the country is in the cycle the part of the deficit doesn't go away when the economy recovers how does this all relate to some data some actual figures for the uk what we have here is a chart showing the annual budget balance for the uk government and measured as a percentage of the size of the economy percentage of gdp since 1999. deliberately put those early years in because you can see that in 1999 2000 return of millennium the government was running actually a budget surplus a negative deficit in that slide in that sense albeit a small one but since then you can see that actually in most years every year since 2002 2001 the government's been running a budget deficit so what can we see from this data well we can see from the data and in particular the size of the structural deficit increased substantially from around 2008 to 2009 onwards we know that the government that the uk economy went into a recession in 2008 and you can see that the orange bit the cyclical deficit went from surplus to deficit that is sometimes known as the workings of the automatic stabilizers in a recession tax revenues fall government spending on welfare and other items goes up so it's almost inevitable that there will be a cyclical fiscal deficit in the immediate aftermath of a recession and hopefully you can see that the uk goes into access in 2008 the orange segment becomes quite hefty adds to the total deficit indeed in 2009 2010 the fiscal deficit peaked at nearly 10 percent of the value of uk national output now glance earlier in recent times gradually the size of the orange segment has shrunk the economy has been recovering unemployment has been falling it's now at a 42-year low uh to use another macro indicator the size of the output gap has been getting smaller so actual output has been getting closer to its longer and productive potential and because the economy has been growing since 2010 2011 the size of the cyclical fiscal deficit has been shrinking indeed in 2016-2017 according to the office of budget responsibility there was not a cyclical fiscal deficit and one would expect that because we are eight years on from the end of the last recession however look at the blue segment the blue segment remains in deficit so a key evaluation point for you is that the british economy appears to have quite a sizable structural fiscal deficit which at the moment is between two and a half and three percent of gdp that's the bit of the deficit that doesn't go away once the economy has recovered now it's come down the structural deficit has fallen uh government policies for example to limit welfare and to try and increase tax take particularly from people with a second or third income may have had an effect there but one has to think of other reasons why there could still be a structural fiscal deficit in the economy is it for example in part the result of corporate tax avoidance companies making huge profits but paying very little incorporation tax is it wider tax avoidance and tax evasion by individuals is it for example a structurally high level of government spending which the government's finding it quite hard to to bring down particularly areas such as healthcare and transport and defence either way eight years into recovery the british government still has quite a sizable fiscal deficit and they're hoping to move the deficit into balance by 2021 maybe 2022 but it's unlikely we're going to get to the sort of budget services that we saw nearly 20 years ago so there we go i've just taken you through the difference between the cyclical and the structural budget deficit in a nutshell in a recession in a downturn the cyclical deficit goes up and in fact should disappear perhaps become a surplus during a boom time the structural deficit is that part of the fiscal deficit which doesn't go away when an economy has recovered from a previous recession and the uk does have albeit shrinking it does still have a sizable structural budget deficit so quite an important idea in fiscal policy in macroeconomics and it's one of those factors which is perhaps holding the government back from being able to lift its own spending perhaps in order to try and stimulate demand during this period of brexit uncertainty okay thank you