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Homework answers / question archive / State true or false and justify your answer: Budget surpluses from 1998 to 2001 gave way to deficits because a recession reduced tax revenues

State true or false and justify your answer: Budget surpluses from 1998 to 2001 gave way to deficits because a recession reduced tax revenues

Economics

State true or false and justify your answer:

Budget surpluses from 1998 to 2001 gave way to deficits because a recession reduced tax revenues.

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Yes, budget surpluses from 1998 to 2001 gave way to deficits because a recession reduced tax revenues. First, we can look at the tax revenue after 2001, which can be accessed on Fred using the link below. It is easy to observe that tax revenue declined almost 30% from its peak in 2001. Part of this is due to tax cuts, but most of it is due to simply less economic activity because of a recession started in 2001. In addition, government spending increases due to increases in defense, healthcare, education, and support programs for those who were affected by the recession. Together, these would cause the budget surplus to turn into a budget deficit.