Final answer:
The cyclically-adjusted budget estimates the Federal budget deficit or surplus if the economy were at full employment, removing the effects of economic cycles and automatic stabilizers to reveal the government's underlying fiscal position.
Step-by-step explanation:
The cyclically-adjusted budget estimates the Federal budget deficit or surplus if the economy were at full employment. The concept of a cyclically-adjusted budget takes into account the automatic stabilizers in the economy, which are mechanisms that help to dampen the impact of economic fluctuations without any active government intervention. For instance, during economic recessions, governments typically incur larger deficits due to reduced tax revenues and increased welfare spending, whereas in economic booms, surpluses may increase due to higher tax revenues and reduced welfare expenditures.
This adjustment allows economists and policymakers to understand the underlying fiscal position of the government, abstracting from the cyclical ups and downs of the economy. The cyclically-adjusted budget figure is different from the actual deficit or surplus as it does not reflect the current economic conditions, but rather what the budget balance would be under a scenario of full employment and normal economic activity. This measure is particularly useful for assessing the fiscal stance of a government's policies over the longer term, beyond the short-term impacts of economic cycles.
The Congressional Budget Office (CBO) calculates the cyclically-adjusted budget, also known as the standardized employment budget, to provide a clearer picture of the budget's structural balance. It removes the temporary effects of the economic cycle, thereby showing what the budget deficit or surplus would look like with the economy operating at its potential output.