Things you need to know about the deficit

1 The deficit is not the same as public spending

   

  The deficit is the gap between public spending (the amount the

   government spends) and tax revenue (the amount it raises in

   taxes). So public spending isn’t the only thing that matters: if tax

   revenue falls, the deficit increases. That’s one reason why tax

   avoidance and evasion are so bad for the economy.

2 The deficit has increased because of the

   banking crash and recession that followed

   

  Before 2008, the Labour government was running a relatively

  small deficit – less than that of the previous Conservative

  government. But the banking crash and recession caused tax

  revenue to go down (for instance companies made smaller profits

  and so paid less corporation tax) and public spending to go up

  (people lost their jobs and so received more benefits).

3 Cutting spending can cause tax revenue to fall

  Cutting public spending puts public sector workers out of work. This

  means they no longer pay taxes or spend as much in local shops and

  businesses, worsening the recession. So cutting the public sector

  has a knock-on effect on the private sector – and the result is the

  government collects less of the taxes that would help cut the deficit.

4 Spending cuts can cause public spending to rise

 Yes, you read that right. Governments can choose to cut, say,
  youth centre workers or carers for elderly people. This is called
  discretionary spending. But by putting people on the dole such cuts
  cause spending on unemployment and other benefits to rise. This is
  called mandatory spending and is determined largely by the state
  of the economy, not Treasury targets. Instead of paying people to
  provide useful public services, we pay out more in benefits.

5 Economic growth can shrink the deficit

  Ultimately we need economic growth to reduce the deficit. Otherwise
  we are stuck in a vicious circle, with more cuts leading to lower tax
  revenue and higher spending on benefits – which leads to calls for
  yet more cuts. But right now there is little demand in the economy
  and companies are unwilling to invest. The only way out is for
  government to fill the gap, by switching from cuts to investment.

 FALSE ECONOMY is the website
 for everyone concerned about
 the impact of the government’s
 spending cuts on their community,
 their family or their job.
 FalseEconomy.org.uk