Working Paper

The Prince('s) Rules: Economic Theories and Political Struggle in Europe.

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The Cyclically Adjusted Budget (CAB) is the estimated size of the public budget at some previously defined level of output which may represent the ‘normal’ output or a policy target and that usually is considered to be unaffected by business fluctuations or cycles. Such an estimate is supposed to isolate the automatic movements of revenues and expenditures, given the current structure of tax and transfers, from discretionary fiscal interventions and indicate the “impact” and sustainability of fiscal action.

But this definition hardly does justice to the long and contentious history of this fateful estimate, which has been differently named, interpreted and calculated over the years and played a crucial role in many of the most important controversies in macroeconomics and public policy.

This paper traces the evolution of the concept through time, tying it to the history of economic thought as well as economic history and policymaking. The reconstruction illustrates the important role the distribution of power plays in the evolution of economic theory and policy as the historical forms of the state-market relationship evolve. Here, however, we will focus mainly on the case of the European Union and Eurozone.