Final answer:
During recessions, government budget deficits typically increase because economic slowdowns lead to decreased tax revenues, and spending on government support programs rises. History shows that this pattern is consistent, as seen in the early 2000s and the recession of late 2007. Therefore, the answer is that deficits increase due to lower tax revenues and higher government expenditures.
Step-by-step explanation:
In a recession, government budget deficits usually increase because of a combination of factors. During such times, tax revenues typically decrease due to a slowdown in economic activity which results in lower income and profits and, consequently, less tax being paid.
At the same time, government expenditures increase as more people become eligible for unemployment and welfare benefits due to job losses and declining incomes. Further exacerbating the issue, fiscal policy during recessions often involves reducing tax rates to stimulate the economy and increasing government spending on projects to boost economic growth.
Historical data supports this pattern. For example, during the early 2000s recession that began in March 2001, tax revenues declined as economic activities slowed down. Furthermore, government spending increased significantly in areas such as defense, healthcare, education, and Social Security, contributing to the budget deficits. The severe recession that started in late 2007 witnessed an even more pronounced effect with government spending climbing and tax collections falling to exceptionally low levels, leading to substantial deficits.
When government spending exceeds tax collection, a budget deficit occurs. Conversely, when tax collection exceeds government spending, there is a budget surplus. Thus during economic booms, with higher incomes and lower unemployment, tax revenues increase and spending on social support decreases, leading to decreased deficits or even surpluses.
Considering the aforementioned factors and historical examples, the correct option in this case is (c) budget deficits increase because tax revenues go down and government expenditures go up.