Background
Cyclically adjusted PSBR (Public Sector Borrowing Requirement) is used to gauge the underlying need for government borrowing without the distortions caused by periods of above or below average economic activity. It provides a clearer picture of fiscal policy’s integrity by adjusting for economic cycles.
Historical Context
The concept emerged in efforts to track fiscal health beyond the cyclical impacts of economic fluctuations. Recognizing that periods of economic boom or recession can exaggerate short-term borrowing needs, economists developed this measure for more accurate long-term fiscal analysis.
Definitions and Concepts
- Public Sector Borrowing Requirement (PSBR): The shortfall between government revenue and expenditure within a given year.
- Cyclically Adjusted: Adjustments made to account for temporary economic upturns or downturns, reflecting a standard or “normal” level of economic activity.
Major Analytical Frameworks
Classical Economics
Views such concerns as marginal; focuses more on limits to public sector borrowing and impacts on private investment.
Neoclassical Economics
Stresses the importance of understanding cyclical adjustments for maintaining long-term fiscal sustainability and avoiding crowding out due to excessive public borrowing.
Keynesian Economics
Emphasizes countercyclical fiscal policy, advocating borrowing during economic downturns to stabilize output, making the cyclically adjusted PSBR a crucial measure.
Marxian Economics
Analyzes PSBR as a reflection of capital requirement shifts in society and the state’s role in mediating economic cycles.
Institutional Economics
Considers the broader institutional frameworks that define fiscal policies and their adjustments for economic cycles.
Behavioral Economics
Does not focus extensively on cyclically adjusted PSBR but places relevance on governmental behavior in borrowing practices under different economic conditions.
Post-Keynesian Economics
Supports the Keynesian advocacy for countercyclical spending, noting the cyclically adjusted PSBR as important for judging appropriate borrowing for full employment.
Austrian Economics
Critiques fiscal policies necessitating borrowing, thus viewing emphasis on cyclically adjusted measures largely as complicating government roles in markets.
Development Economics
Utilizes cyclically adjusted PSBR to better comprehend fiscal health in developing countries, where economic cycles may dramatically sway public borrowing needs.
Monetarism
Supports restrained public sector borrowing to control inflation, using cyclically adjusted metrics to argue for sustainable fiscal positioning.
Comparative Analysis
Different schools of economic thought prioritize the use of cyclically adjusted PSBR to varying extents, aligning it either with macroeconomic stability, long-term sustainability, or development needs.
Case Studies
Country-level evaluations shed light on how such adjustments can reflect more realistic fiscal policies amidst cyclic variations, notably in economies hit by recurrent cycles such as those in Latin America or Eastern Europe.
Suggested Books for Further Studies
- “Public Finance in Theory and Practice” by Richard A. Musgrave
- “The Economics of Public Spending” edited by David Miles, Gareth Myles, and Ian Preston
- “Theories of Fiscal Policy” by Lena Wangnerud
Related Terms with Definitions
Fiscal Policy: Government policies related to taxation and spending aimed at influencing economic conditions.
Budget Deficit: The financial state where governmental expenditures surpass its revenues during a particular period.
Economic Cycle: The natural fluctuation of the economy between periods of expansion (growth) and contraction (recession).
