Full-Employment Budget Deficit

Full-employment budget deficits occur when the national economy is at full employment, yet the federal budget is still operating at a deficit. Full employment does not mean an unemployment rate of 0 percent, it just means that the employment-to-output level is optimal or in equilibrium. A budget deficit occurs when the government is spending more money than it is bringing in.

Full employment has two parts, employment and economic output. At full employment, the unemployment rate is low, around 5 percent. The economic output of the country, meaning the number of goods produced and services provided in the country, must be at least 85 percent for the government to consider the country at full employment. This means that the country is producing goods and providing services at its maximum capacity.

The main sources of government revenue are individual income, payroll, corporate and excise taxes. During full employment, more people and businesses are paying these taxes, so government revenues are increasing and the economy is generally stable or growing. Government budgetmakers forecast future economic growth on the current economic conditions. During a time of full employment and economic growth, the government budgetmakers will assume that revenues will continue to grow. It is on this forecast revenue growth that budgetmakers will base future government spending. When the actual revenues fall short of expected or forecast revenues during full employment, it creates a full-employment budget deficit.

The main reason why the government would experience a full-employment budget deficit is simply that the economy fell short of performing as forecast by government budgetmakers and revenues were less than what they expected them to be. Basically, the government spent more money during the year than it expected to earn, even though the economy was operating at full capacity and full employment. As a result, the government will have to borrow additional funds that it didn't expect to borrow to cover the unexpected budget deficit.

One way to cure or at least alleviate full-employment budget deficit is to increase both individual income and corporate business taxes. An increase in taxes equals an increase in government revenue. Since during full employment the economic output is considered to be at its capacity, the creation of new jobs may not be a viable cure to the deficit. Decreasing government spending is also a way to alleviate or cure a full-employment budget deficit.