324 AUCO Czech Economic Review, 2007, vol.1, no. 3 Czech Economic Review vol. 1 no.°3, pp. 324-334 Acta Universitatis Carolinae Oeconomica Jan ZÁPAL * THE RELATION BETWEEN THE CYCLICALLY ADJUSTED BUDGET BALANCE AND THE GROWTH ACCOUNTING METHOD OF DERIVING ‘NET FISCAL EFFORT’ This paper deals with the growth accounting method used to derive “net fiscal effort”. Net fis- cal effort can then provide a clue about whether fiscal policy is expansionary or not, and, to- gether with data on economic performance, can answer the question of the pro- or anti-cycli- cality of the fiscal stance. Traditionally, the answer to such questions has been provided via the cyclically adjusted budget balance. I argue that the relatively computationally intensive and data demanding process of estimation of the cyclically adjusted budget balance can be re- placed by the simple growth accounting method without significant loss of information. I argue that in the general case, the answers provided via the growth accounting method will not differ widely from the conclusions provided via the cyclically adjusted budget balance. I then illu- strate the use of growth accounting on Czech fiscal data and compare the outcomes of both methods. The conclusions reached in the empirical part fit nicely with the conclusions of the theoretical part of the paper.. Keywords: expansionary/contractionary fiscal policy, cyclically adjusted budget balance, growth accounting, net fiscal effort JEL classification: C82, H62 Acknowledgements:Financial support from the IES (Institutional Research Framework 2005– –2010, MSM0021620841) is gratefully acknowledged. 1. Introduction One of the roles often ascribed to government is that it should conduct a stabi- lizing economic policy to prevent periods of deep economic downturns and periods when the economy is overheated. Generally, two basic tools may allow government to do so, the first being monetary policy and the second being fiscal policy. It is the fiscal part of stabilization policy which this paper examines. Since governments in most developed countries redistribute more than 40 per- cent of GDP through their budgets, government decisions about the size and com- * Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, and London School of Economics and Political Science (PhD programme); (j.zapal@lse.ac.uk) or (j.zapal@gmail.com). I would like to thank Vladimír Bezděk, whose suggestions initiated the search for the answers to the questions I deal with in this paper.