Final answer:
Evaluating fiscal policy involves adjusting for automatic changes in tax revenues. Automatic stabilizers allow fiscal policy to respond to economic cycles without new legislation. The standardized employment budget is an analytical tool for comparing actual and potential budget outcomes.
Step-by-step explanation:
Evaluating the status of fiscal policy requires adjusting deficits and surpluses to eliminate automatic changes in tax revenues. When discussing automatic stabilizers in the context of fiscal policy, we are referring to the mechanisms within taxing and spending that naturally adjust in response to economic events, without any direct intervention or new legislation from the government. These include changes that occur due to fluctuations in the economy, such as when a recession automatically triggers larger deficits (or smaller surpluses) because of a decrease in taxable income and a subsequent decrease in tax revenue, or when a boom results in smaller deficits (or larger surpluses) because of an increase in taxable income and higher tax revenues. This process is automatic and is considered a key feature of modern fiscal policy designed to help stabilize the economy.
Proposals for a perpetually balanced budget are often viewed with skepticism by economists as this would undermine the purpose of these automatic stabilizers, possibly exacerbating economic volatility by preventing the government's budget from naturally adjusting to economic conditions. The standardized employment budget is a tool used to measure what the budget outcome (deficit or surplus) would have been if the economy had been operating at its potential GDP.