Public deficits arise whenever government expenditure exceeds government receipts. This phenomenon may result from various factors, such as an increase in government expenditure, a decrease in taxation, or a decline in receipts due to an economic slowdown. The accumulation of deficit leads to a rise in public debt. This is precisely what happened in many countries in the wake of 2007-2008 financial crises, when a combination of expensive bank bailouts, a decline in tax receipts due to recession, and an increase in government expenditure to fend off recession led to a record high deficit of 7.5 percent of GDP for the entire OECD area in 2010 and a record high public debt-to-GDP ratio of 94 percent in 2014.
Public deficits arise whenever government expenditure exceeds government receipts. This phenomenon may result from various factors, such as an increase in government expenditure, a decrease in
However, government budget deficits might be quite unsavory to the electorate. Thus, elected governments are sometimes tempted to “cook the books” and use “creative accounting” to present official deficit figures that seriously underestimate the real balance of government budgets. Governments may engage in “below the line” operations through which certain types of transaction are not accounted for, but do have an impact on overall debt. A recent study shows the frequency of such operations among OECD countries before regular elections.
- If governments sometimes have the incentive and the capacity to use “creative accounting”, what instruments do tax payers and citizens have at their disposal to establish realistic estimates of government budgets?
- The government has just announced spending cuts of $20 billion with no change in taxation. Given that the government expenditure equals $200 while tax receipts amount to $ 180. Would that suffice to reach the government’s twin objectives- a balanced budget and a debt-to-GDP ratio below the OECD average?
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