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When the structure of a government’s budget is such that its promised disbursements exceed the structure of its receipts. In this case the government, even under normal circumstances, will run a budget deficit and accumulate debt.
A deficit bias has been apparent in Europe since the mid-1970s when deficit levels for most European countries began to grow. The deficit bias in Europe was due to
- Insufficient revenue collection.
- Most European tax systems have or had a narrow base.
- There are relatively few people who pay taxes because of high minimum income eligibility requirements and liberal tax exemptions.
- Most European tax systems have very high marginal tax rates (the percentage you pay of your income or profit).
- Those who do pay taxes have a substantial tax bill. This can lead to lower tax collection for a few reasons:
- It provides a disincentive to work. If you knew that a large percentage of what you earned was going to be taken by the government, you just might decide to work a little less and play a little more.
- It leads to high levels of tax evasion. In order to avoid paying high taxes, many decide to hide their income from the government.
- It could cause those who do earn the most money to move their business elsewhere, where the taxes are less.
- Large spending obligations needed to support the welfare state and redistribute wealth in an effort to gain greater equality.
- Most European countries provide liberal social security benefits to the poor, disabled, and elderly.
- Most European countries provide public healthcare services to their citizens covering basic medical needs.
- Most European governments own and run large public companies. Often they have bought these companies because they were failing. The government either absorbs the losses or pays these companies a subsidy to keep them running.
- Most European countries heavily subsidize certain industries (specifically agriculture)
- Most European countries provide very liberal unemployment benefits. In some cases it is more profitable to stay on government support than it is to work and earn income.