Measuring the Effects of the Business Cycle on the Federal Budget: An Update

by Sabrina I. Pacifici on September 7, 2009

Measuring the Effects of the Business Cycle on the Federal Budget: An Update, September 1, 2009

  • Under CBO’s assumptions for its baseline, the cyclically adjusted budget deficit will rise sharply in 2009, to 8.6 percent of potential gross domestic product (GDP) (from 2.7 percent in 2008). Potential GDP is the amount of output that corresponds to a high level of resource (labor and capital) use. The cyclically adjusted budget deficit then decreases in 2010 to 6.3 percent of potential GDP and in 2011 to 3.4 percent. Those deficits are smaller than the unadjusted deficit estimates because the latter include the automatic responses of revenues and outlays to the recession. CBO expects that economic output will be much farther below potential in 2009, 2010, and 2011 than it was in 2008, which is to say that the business cycle will substantially increase the federal budget deficit in those years. When the economy reaches its potential level of output, the cyclically adjusted measure of the budget balance will
    match the unadjusted measure.”

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