Answer to Question #224776 in Macroeconomics for Wajeeh

Question

What is the full-employment budget surplus, and why might it be a more useful measure than the actual, or unadjusted, budget surplus? The text provides other names for this measure, such as cyclically adjusted surplus and structural surplus. Why might we prefer to use these other terms?

Answer 1

A budget surplus assuming full employment is a budget surplus that can be formed if the economy is in a state of full employment. The budget surplus, assuming full employment, provides a means of assessing policy that does not depend on the specific state of the business cycle.

Fiscal expansion leads to a reduction in the state budget surplus, and a strict fiscal policy, on the contrary, leads to an increase in the budget surplus. Thus, the budget surplus could serve as a simple and convenient indicator of the fiscal policy being pursued: the growth of the state budget deficit would give grounds to assess the fiscal policy as stimulating, aimed at increasing output.

But this indicator of the fiscal policy pursued by the state has

a serious drawback. The budget surplus may change as a result of changes in autonomous expenditures that are not related to the current economic policy.

The economy is also subject to cyclical changes in output. If the economy enters a period of recession, then tax revenues decrease and, as a result, the budget surplus decreases and, conversely, when the economy rises, the budget surplus increases, although there may be no changes in fiscal policy.