The cyclically adjusted budget balance (CAB), sometimes called the structural budget balance, is an estimate of what a government's revenues minus expenditures would be if the economy were operating at its potential level of output rather than its actual level. By removing the automatic effects of the business cycle—lower tax receipts and higher unemployment-related spending in downturns, and the reverse in booms—the CAB isolates the portion of the deficit or surplus that reflects deliberate policy choices.
The calculation typically subtracts a cyclical component from the headline (nominal) balance. That cyclical component is the output gap multiplied by a country-specific budget sensitivity parameter, which captures how much revenues and outlays move with GDP. The IMF, OECD, and European Commission each publish their own CAB series using slightly different methodologies for estimating potential output (often a production-function approach) and elasticities.
CAB figures are central to several fiscal rules. The EU's Stability and Growth Pact, reinforced by the 2012 Treaty on Stability, Coordination and Governance (the "Fiscal Compact"), sets medium-term objectives in structural rather than headline terms, requiring most euro-area members to keep their structural deficit below 0.5% of GDP. Germany's Schuldenbremse (debt brake), enshrined in the Basic Law in 2009, similarly limits the federal structural deficit to 0.35% of GDP.
A further adjustment yields the cyclically adjusted primary balance (CAPB), which also excludes interest payments and is widely used to assess fiscal effort and debt sustainability.
Limitations are significant. Potential output is unobservable and frequently revised, which means CAB estimates can change substantially in retrospect. Critics argue that the procyclical revisions seen after 2008 led some European governments to tighten fiscal policy more than necessary. Even so, the CAB remains the standard analytical tool for separating discretionary fiscal policy from automatic stabilizers.
Example
In its 2023 Fiscal Monitor, the IMF reported that the United States' cyclically adjusted primary deficit widened in 2023 despite a closed output gap, signaling discretionary fiscal loosening.
Frequently asked questions
The headline deficit is the actual gap between revenue and spending in a given year; the CAB removes the part driven by where the economy sits in the business cycle, leaving only the structural component.
Keep learning