The Importance of the Budget Deficit Decomposition into a Structural and a Cyclical Component

Piotr Krajewski

doi:10.18778/1508-2008.7.07

Authors

Piotr Krajewski

DOI:

https://doi.org/10.18778/1508-2008.7.07

Abstract

Within a budget deficit, a structural and cyclical component can be separated. The cyclical component of the budget deficit is the result of the cyclical run of economic processes and does not influence public finance balancing over the business cycle. The structural deficit means that the public finance is permanently imbalanced due to the applied systemic solutions. The determination of the structural deficit allows a more precise assessment of public finance balancing.

Maintaining the balanced structural budget enables to combine stabilizing anticyclical policy with medium-term public finance balancing. Due to this, the concept of deficit adjusted for cyclical fluctuations can be used to apply the rules of fiscal policy. The Stability and Growth Pact that regulates fiscal policy in the Economic and Monetary Union is largely based on the concept of the structural deficit. In accordance with the Stability and Growth Pact, countries that belong to the Economic and Monetary Union should maintain balanced structural budgetary positions.

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