Built on sand: The structural deficit in the ups and downs of the economy

The sudden worsening in the durability of public finance - from a nearly balanced budget in 2007 to an estimated cyclically adjusted deficit of 4.5% for 2010 - raises the question of the validity of the so-called structural deficit. For the period 1996-2009 a clear connection exists between cyclical development and the structural deficit determined by standard methods. To be sure, this connection can be explained in part by changes in taxation policies. Nevertheless, the suspicion arises that the structural deficit is overestimated in economically weak phases and underestimated in upswing phases.