The Macro Economy Today by Bradley Schiller & Bradley Schiller

Author:Bradley Schiller & Bradley Schiller [Schiller, Bradley]
Language: eng
Format: azw3
Publisher: McGraw-Hill Higher Education
Published: 2018-01-22T16:00:00+00:00

The cyclical deficit shrinks when GDP growth accelerates or inflation decreases.

All of these cyclical changes in the budget Page 255 occur automatically. Hence, we can’t blame (or credit!) Congress or the President for every change in federal deficits. To assess the effect of policy decisions on the budget, we need another measure of budget dynamics.

Structural Deficits

To isolate the effects of fiscal policy, economists break down the actual budget balance into cyclical and structural components:

The cyclical portion of the budget balance reflects the impact of the business cycle on federal tax revenues and spending—the automatic changes we’ve discussed. The structural deficit reflects fiscal policy decisions. Rather than comparing actual outlays to actual receipts, the structural deficit compares the outlays and receipts that would occur if the economy were at full employment.1 This technique eliminates budget distortions caused by cyclical conditions. Any remaining changes in spending or outlays must be due to policy decisions. Hence, part of the deficit arises from cyclical changes in the economy; the rest is the result of discretionary fiscal policy.

Table 12.3 shows how the total, cyclical, and structural balances have behaved in recent years. Consider what happened to the federal budget in 2000–2001. In 2000 the federal surplus was $236 billion. In 2001 the surplus shrank to $128 billion. The shrinking surplus suggests that the government was trying to stimulate economic activity with expansionary fiscal policies (tax cuts, spending hikes). But this wasn’t the case. The primary reason for the smaller 2001 surplus was an abrupt halt in GDP growth. As the economy slipped into recession, the cyclical component shifted from a surplus of $58 billion in 2000 to −$1 billion in 2001. This $59 billion swing in the cyclical budget accounted for most of the decrease in the total budget surplus. By contrast, the structural surplus shrank by only $49 billion, reflecting the absence of significant discretionary fiscal stimulus.

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