A Dynamic Definition of the Structural Budget Deficit
10 Pages Posted: 11 Dec 2014
Date Written: December 9, 2014
The debate over legal requirements of a balanced federal budget has gained new life. A requirement would have strong implications for future fiscal policy. Done right, a requirement will allow Congress to combine a balanced budget with policy goals such as growth and full employment. Done wrong, the requirement can force Congress into a conflict between the balanced budget and other desirable policy goals.
This paper explores the relation between a balanced-budget requirement and the structural budget deficit. A dynamic definition of the structural deficit is offered as an alternative to a traditional, static definition. The definition focuses on the performance of the economy, rather than its capacity utilization, a focus that ties the structure of the economy to the deficit via the ability of taxpayers to pay for long-term entitlement commitments.
Keywords: Macroeconomics, budget deficit, balanced budget, fiscal policy
JEL Classification: E24, E30, E32, E62, E65, E66, H00, H50, H55, H59, H6, H62,
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