PSNCR Theories - PSNCR and the Trade Cycle - Why does it vary?

The PSNCR tends to change along with the state of the economy. When things are going well and the economy is booming, the PSNCR will tend to be falling (unless the government is going mad spending on other things!). This is because a booming economy means low unemployment and low unemployment means less spending on benefits. Not only that, but when people are employed they will spend more, and this will boost VAT and other indirect tax receipts.

The impact of a recession on the PSNCR will be the opposite. Increasing unemployment means more spending on benefits, increasing the level of government expenditure. Unemployed people don't pay income tax, and others may find their incomes falling. The combination of these two effects means that the government receives less income tax. Spending also will fall as people have less money and are more reluctant to spend what they do have because of uncertainty about the future. As spending falls so does the government's revenue from indirect taxes. As if all this weren't enough of a problem, the performance of firms will also affect the government's finances. In times of recession, firms' profits will fall, in fact they may even make losses. Since corporation tax is paid on profits, the governments tax revenues will be hit even further.

So boom periods should help to lower the PSNCR, while recessions and economic slowdown will tend to push it back up again.