In addition to the automatic responses of fiscal
policy, governments may make discretionary fiscal
changes in the face of an economic downturn.
Expansionary fiscal policy aims to boost demand
and output in the economy either directly, through
greater government expenditures, or indirectly,
through tax reductions that stimulate private consumption
and investment spending.
The standardized surplus provides a good way to
measure these discretionary changes by correcting
the actual budget surplus for changes due to the
effects of automatic stabilizers. Figure 1 shows the
standardized surplus based on the Congressional
Budget Office’s (CBO) April 2002 projections.
It illustrates the swing in discretionary fiscal policy
since 2000, with the standardized surplus falling
from 1.3% of GDP in 2000 to a projected deficit
of 0.8% of GDP for 2002. Legislated fiscal actions
taken since January 2001 reduced the standardized