The Study On The Relationship Between Government Fiscal Deficit And Employment

Fiscal deficit refers to an excess of expenditures over revenue in a fiscal year. As one of macroeconomic policies, budget deficit is used by government to interfere the economy, which aims at four major objectives, including full employment, price stability, a high, but sustainable, rate of economic growth and keeping the balance of payments in equilibrium. Facing the recent economic crisis, many countries’ governments chose to adopt fiscal deficit, or budget deficit, policy to stabilize economy and national employment. Because of the world’s largest population, the employment issue plays an extremely crucial role in China’s national economy. With such background, the research on deficit and employment not only has theoretical value but more importantly, the practical significance.In this paper, the study on fiscal deficit, in most cases, budget deficit, and employment is conducted by both theoretical research and empirical method. First, based on classic economic theories and research literatures, the thesis establishes a theoretical framework of the correlation between fiscal deficit and employment. It explains the mechanism of the effects on employment from the economic effects of deficit, government expenditure and revenue policy respectively, and it provides a theoretical basis for the empirical study. Secondly, summary of a comparative study of US, EU and some Asian countries is presented, which reviews the deficit and employment situation in these countries and compares the governments’fiscal policies on employment. It shows the effects of budget deficit on employment in practical and is also a useful reference for China. Finally, the empirical study of deficit and employment indicates a strong positive effect. Using data of China for the period 1980 to 2012, this paper analyzes how the fiscal deficit affects urban employment. Controlling for the impact of the growth, income gap, investment and education, the result suggests an increase in deficit is likely to boost Chinese urban employment. Income gap, investment and education show the same positive effect.On the basis of theoretical research and empirical analysis, some policy suggestions are proposed at the end of the paper. The objective of employment growth should be regarded equally important as economic growth. With the positive effect of moderate budget deficit policy, the government should use well-targeted fiscal expenditure policy, focusing on areas such as public construction investment, urbanization and education, and large-scale tax reduction to achieve employment growth.