Question

The government purchases of goods & services G actually decreased slightly due to the coronavirus shutdowns (mainly due to school closures and curtailed government administration). Does it mean that the budget deficit (G – T) has decreased? Why or why not? Explain in 150-200 words.

Answer 1

No, a small reduction in G does not mean that the budget deficit has decreased. This is because the taxes will also go down and the decrease can be large. due to the Covid -19 pandemic, many firms have become unprofitable and engaged in massive layoffs. This has reduced the income level for a lot of people in the economy as unemployment is reaching new heights. Thus, these people will not be able to pay any taxes and the direct tax income for the government will fall. If the fall is enough, it will compensate for the decline in G and budget deficit will rise. Moreover a decline in G can be reversed soon as well, As the government engages in an expansionary fiscal policy by increasing cash transfers and unemployment benefits, the G is expected to rise in the short to mdium run and thus the deficit will surely increase.