Cyclically adjusted surplus
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 unrelated 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 to know this type of surplus is as a full employment, normalized budget, or structural surplus. The potential character assumes that this surplus would be achievable in the event that, maintaining the existing fiscal policy and the forecasts of public spending in a country, production is achieved at what is called its natural level.
By definition, in an expansionary phase, GDP exceeds its long-term trend level, and there is a volume of income greater than that of expenditures. Therefore, a surplus arises. Thus, we see that in the economy there is an important component of surplus that is closely related to business cycles. Hence the concept of cyclical surplus (and its opposite case, the cyclical deficit).
On the other hand, the cyclically adjusted surplus is affected by different events related to public income and expenses, which at a practical level can be fiscal changes such as tax increases in conjunction with increases or decreases in tax rates or the bases that are levied. In other words, the so-called structural changes.
Calculation of cyclically adjusted surplus
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 its forecasts. When there is an economic expansion, higher income is recorded in the public sector, while expenses are maintained or even decreased. The State collects more because individuals and companies in the private sector have higher profits and pay more taxes.
Therefore, the cyclically adjusted surplus is calculated by discounting its cyclical surplus from the recorded surplus. At a basic level, the expected surplus is subtracted from the one finally observed in order to know it.
The formula to calculate 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 balance obtained is negative (positive), we would speak of a cyclically adjusted deficit (surplus).
Qualifying and measuring the cyclical part with precision is somewhat complicated because 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, to the economic situation or to both aspects.