Question

The federal government ran a budget surplus in the late 1990 and in the year 2000,

but has since returned to running a budget deficit.
1. Explain why reducing the budget deficit can cause short-term pain in the form of
lower employment, higher unemployment, and a recession.

Answer 1

Reducing a budget deficit can result in higher unemployment and a recession due to decreased government spending and/or increased taxes, which lower demand in the economy.

Step-by-step explanation:

Reducing the budget deficit may necessitate the federal government either increasing taxes or decreasing spending, both of which can remove financial resources from the economy. When the government reduces its spending, it can lead to job losses in public sector jobs and among contractors and businesses that benefit from government spending, resulting in higher unemployment.

Similarly, tax increases leave individuals and businesses with less disposable income. These actions, while aiming to reduce the deficit, can reduce overall demand in the economy, leading to a possible recession. The reduction of a budget deficit in the short term can therefore lead to economic contraction with attendant increases in unemployment and potential social distress.