Specifically, they agreed to cap annual "structural" budget deficits at 0.5 percent of GDP, with penalties imposed on countries whose total fiscal deficits exceeded 3 percent of GDP - a limit that would include both structural and cyclical deficits
Distinguish between structural and cyclical deficits
. A financial crunch owing to a fundamental mismatch between income and outflows requires a very different approach from one that arises out of a temporary downturn in revenues.
(3) To begin, suppose for simplicity that the economy has achieved the full-employment level of real income [Q.sup.FE] such that both tax revenue and government expenditure are equal to [Q.sup.FE]A, the government budget is balanced and the structural and cyclical deficits
CYC (*) Cyclical deficit
. (real NIPA -0.13 0.91 deficit/real potential GNP) - (real high employment deficit/ real potential GNP)*(-100) (from Standard and Poor's DRI Basic Economics database).
The temporary fiscal relief payments reviewed in this report were designed to provide assistance to help state and local governments address cyclical deficits
prompted by the recent economic downturn.
Since the timing of the cycle adopted in 1997 was one in which an upswing is followed by a downswing, cyclical surpluses tend to precede cyclical deficits
and the surpluses are therefore upvalued relative to the deficits.
Structural deficits, as opposed to cyclical deficits
caused by recessions, arise when there's a mismatch between growth in spending needed to maintain current services and growth in revenues from current taxes and fees.
However, the use of automatic stabilisers is subject to cyclical deficits
being in a state of balance.