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Business Cycles and Public Finances - Part 1

Developments in the government budget balance depend on the fiscal policy stance as well as the cyclical situation. This article focuses on various methods of adjusting the actual budget balance for both cyclical and other temporary fluctuations. This provides a structural balance measure that captures the underlying trends in public finances. The structural budget balance is calculated by a number of national and international institutions. Deviations between the calculations can be attributed to different methods of calculation of the cyclical part of the balance as well as to the extent of adjustment for other temporary factors. In the most widely used method, the calculation depends on the output gap estimate. Moreover, in the compilation of Denmark's structural budget balance it is essential to adjust for substantial fluctuations in a number of revenue items.