Budgetary Measures of Fiscal Performance

Abstract

It is now well established that the actual or realized budgetary surplus (deficit) is poorly suited as an index of the strength and direction of fiscal policy. To a considerable extent, its inadequacy stems from the fact that the budget surplus reflects as well as affects the level of aggregate income. In technical jargon, the realized surplus is endogenous to the economic system; as such, it cannot exert an independent impact upon economic activity. To serve as a useful tool of macro-economic planning and as a basis for appraising past policy decisions, the budget surplus must be purged of its endogenous components. It was to this end that the concept of the full-employment budget surplus was developed. In what follows, the usefulness of the fullemployment surplus as a policy tool and as a measure of fiscal performance will be analyzed. It will be demonstrated that for certain mixes of fiscal action, the F. E. S. will fail to reflect the direction of impact upon economic activity. At this point, an alternative measure, based not upon fullemployment levels of income but existing levels of income, shall be proposed and analyzed. It will be demonstrated that this alternative indicator, while subject to some of the same limitations of the F. E. S., is superior to it in all relevant respects.