A Dynamic Definition of the Structural Budget Deficit

Abstract

The debate over legal requirements of a balanced federal budget has gained new life. A requirement would have strong implications for future fiscal policy. Done right, a requirement will allow Congress to combine a balanced budget with policy goals such as growth and full employment. Done wrong, the requirement can force Congress into a conflict between the balanced budget and other desirable policy goals. This paper explores the relation between a balanced-budget requirement and the structural budget deficit. A dynamic definition of the structural deficit is offered as an alternative to a traditional, static definition. The definition focuses on the performance of the economy, rather than its capacity utilization, a focus that ties the structure of the economy to the deficit via the ability of taxpayers to pay for long-term entitlement commitments.