cyclically adjusted budget deficit

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A calculation of what the government's budget deficit would be if the economy was at a normal level of activity. This is achieved by assuming that the rules and rates concerning spending and taxes are unchanged. As taxes are an increasing and government spending is a decreasing function of national income, during a slump in activity the cyclically adjusted budget deficit will be smaller than the actual, and an actual deficit may correspond to a cyclically adjusted budget surplus. Such adjustments usually do not take account of the probable effect of changing national income on the interest costs of government debt, nor do they take account of the fact that if the budget deficit is itself a target for government policy, a change in activity rates may be accompanied by discretionary changes in government tax and spending policies.

Subjects: Economics.

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