why do recessions make the deficit increaseSolutionIn a rece

why do recessions make the deficit increase?

Solution

In a recession the aggregate demand will be lower than the usual and this inturn results in the decline of consumption and investment. So the firms will be forced lay off the workers. So this causes a decline the tax in the form income tax. The lower aggaregate demand in the economy also results in the decline in the profits of corporates. So there is decline in the corporate tax as well as the income taxes so this will reduce the revenue of the government. And the final outcome is the increase in the deficit of the government.

In recession, the there will be a lot of unemployed people so this will make the government to increase the unemployment insurance. So this force the government to increase the spending so there should be an increase in the deficit.