MacroeconomicsI_working_version (1)

Fiscal Policy in Details 115
programs (such as aid to families with dependent children, handicapped people) etc.
have similar dampening effect.
An automatic stabiliser (built-in stabiliser) is anything, which increases the government
budget deficit (or reduces its budget surplus) during a recession and increases its budget
surplus (or reduces its budget deficit) during inflation without requiring explicit action by
policymakers 4 .
12.3. Structural vs. Cyclical Deficits
Analysing the public finance of a country, we must distinguish between structural and
cyclical deficits. The structural part of the budget is active. It is determined by the actions
of discretionary policies such as size of defence spending, social security payments, and
setting tax rates. Conversely, the cyclical part of the budget relates to the business cycle. It
is passively determined by the fluctuations of GDP around its potential.
Economists define structural and cyclical deficits as follows 5 :
The actual budget records the actual expenditures (dollar, euro expenditures…), revenues
and deficits in a given period.
The structural budget calculates what government revenues, expenditures, and deficits
would be if the economy were operating at potential output.
The cyclical budget calculates the effect of the business cycle on the budget – measuring
the changes in revenues, expenditures, and deficits that arise because the economy is not
operating at potential output but is in boom or recession. The cyclical budget is the
difference between the actual budget and the structural budget.
12.3.1. Financing the Deficits and Disposing the Surpluses
The final effect of the fiscal expansion on the economy depends on the way of financing
the deficit. Similarly, the anti-inflationary impact of the creation of a budget surplus
depends on what is done with the surplus.
• Borrowing. When government decides to borrow money and enters the money market,
its borrowings may compete with the private business borrowers. This additional
demand crowds out some private investment spending and interest-sensitive consumer
spending. The expansionary impact of the deficit government spending is thus reduced
by a decline in private spending.
• Money creation. The crowding out of private spending can be avoided by financing
the deficit through newly crated money by government and monetary authorities. In that
case, government may increase its expenditures without any adverse effect on
investment or consumption. The effect of financing deficit by new money is more
expansionary than by borrowing, however it is more inflationary.
4 see McConnel,– Brue [10]
5 see Samuelson-Nordhaus [11]