The cyclically adjusted surplus is the difference between the total surplus in an economy and the so-called cyclical surplus. By its nature, it is fundamentally influenced by variations in income and expenses in a country, which are called structural.
Therefore, the cyclically adjusted surplus is oblivious to the effect caused by the stage of the economic cycle that is going through at each moment, so that income and expenses are not related to it (either a moment of economic boom or recession).
Another way of knowing this type of surplus is as a full employment surplus, normalized budget or structural . The potential nature assumes that this surplus would be achievable in the event that maintaining the existing fiscal policy and public spending forecasts in a country achieves a production at what is called its natural level.
By definition, if there is an expansionary phase, the GDP exceeds its long-term trend level, there is a higher volume of income than expenses, and therefore a surplus arises. Thus we see that in the economy there is an important surplus component that is closely related to business cycles . From there arises the concept of cyclical surplus (and its opposite case, the cyclical deficit).
Instead, the cyclically adjusted surplus is affected by different facts related to public expenses and revenues , which on a practical level can be fiscal changes such as tax increases due to increases or decreases in tax rates or the bases that they tax. In other words, the so-called structural changes.
Cyclically Adjusted Surplus Calculation
At a practical level, the cyclically adjusted surplus is understood as the evolution that the country would have in terms of income and expenses within forecasts . When there is an economic expansion, higher income is recorded in the public sector at the same time that expenses are maintained or even decreased. The State collects more because individuals and companies in the private sector have higher profits and pay more.
Therefore, its calculation is made by discounting the cyclical surplus from the registered surplus . At the basic level, the expected surplus is subtracted from the one finally observed to know it.
The formula for calculating this surplus establishes this difference, considering the balance of the total registered budget (SP), its cyclical component (CC) and the balance of the cyclically adjusted component (SAC), resulting in:
When the obtained balance is negative (positive), we would speak of cyclically adjusted deficit (surplus).
Accurately classifying and measuring the cyclical part is somewhat complicated since it is difficult to locate the budget sections only exposed to the cyclical aspect of the economy. The distinction between adjusted or cyclical helps economic analysts to know if the improvement of a country responds to the policies of a government, the economic situation or both.