Deficits and the Fiscal Stance

The automatic stabilizers will lead to changes in the budget deficit unrelated to fiscal policy changes.

A recession will cause tax revenues to fall and the budget deficit to rise. An observer may conclude that fiscal policy is expansionary and that no further government action is required.

Discretionary fiscal policies are actively used to stabilize aggregate demand, such as changes in government spending or tax rates.

Economists often look at the structural (or cyclically adjusted) budget deficit as an indicator of the fiscal stance.

Structural budget deficit is the deficit that would exist if the economy was at full employment (or full potential output).