Yes, that’s correct. When evaluating the status of fiscal policy, it's important to analyze deficits and surpluses in a way that accounts for automatic stabilizers—mechanisms that cause revenues and expenditures to change in response to economic conditions without additional legislative action.
Automatic stabilizers include things like:
- Progressive Tax Systems: As income rises in an economy, individuals pay a higher percentage of their income in taxes, which tends to dampen economic booms.
- Social Safety Net Programs: Programs like unemployment insurance and food assistance automatically increase spending during economic downturns as more people qualify for benefits.
To get a clearer picture of the underlying fiscal policy stance, economists often adjust observed deficits or surpluses for these automatic changes in revenue and use a measure known as "cyclically-adjusted budget balance" or "structural balance." This adjustment reveals the fiscal position if the economy were operating at its full potential (e.g., full employment) rather than at reduced capacity due to economic downturns.
By taking these factors into account, policymakers and analysts can better understand whether a fiscal policy stance is expansionary or contractionary, independent of the current economic cycle's impact on revenues and expenditures. This is critical for making informed decisions about future fiscal policy and managing public finances sustainably.