Products IT. About us Help Center. Log In Where do you want to login? Sign Up. Income Tax Filing. Expert Assisted Services. Tax Saving. Mutual Fund Investments. GST Software. Thus, the role of fiscal policy in economic stabilization is being viewed with increasing importance.
So economists and others are looking towards expanding provisions in the law that automatically increase spending or reduce tax bills when the economy turns down. Automatic stabilizers are mechanisms built into government budgets, without any vote from legislators, that increase spending or decrease taxes when the economy slows.
When times are better, automatic stabilizers generally phase down or turn off. Both taxes and spending can have stabilizing effects on the economy. Most taxes have a stabilizing effect because they automatically move with economic growth.
For example, personal and corporate income tax collections decline during recessions along with income and profits, and payroll tax collections decline when employment and wages fall.
Spending on some transfer programs also depends on the state of the economy. For instance, outlays for unemployment insurance increase when the unemployment rate rises, and spending on anti-poverty programs like Medicaid and SNAP increases during recessions because bad economic times mean that more people are eligible.
As shown in the chart below, the bulk of the value of automatic stabilizers comes from changes in tax revenues, rather than from spending on programs. According to the Congressional Budget Office CBO , revenues have accounted for about three-quarters, on average, of the effect of automatic stabilizers on the budget over the past 50 years CBO One of the benefits of automatic stabilizers is that they do not require legislative action and respond quickly to economic downturns.
Discretionary fiscal policy requires action from Congress, so there may be considerable time lags due to debates on the appropriate response, steps in the rulemaking process, and the administrative actions for funds to reach the pockets of consumers. During the Great Recession, Congress responded relatively quickly: the first fiscal action was the Bush Economic Stimulus Act, which was signed on February 13, , which turned out to be only two months after the recession was later determined to have begun Furman But the largest stimulus package, the American Recovery and Reinvestment Act ARRA of , was authorized five quarters after the start of the recession.
By this time, spending on automatic stabilizers had already grown to 2 percent of potential GDP—the maximum sustainable output of the economy Schanzenbach Any further stabilization requires deliberate changes in policies.
From: built-in stabilizers in A Dictionary of Economics ». Subjects: Social sciences — Economics. View all related items in Oxford Reference ». Search for: 'built-in stabilizers' in Oxford Reference ». All Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single entry from a reference work in OR for personal use for details see Privacy Policy and Legal Notice. Oxford Reference.
As soon as income starts to change, they go to work. Because they affect disposable personal income directly, and because changes in disposable personal income are closely linked to changes in consumption, automatic stabilizers act swiftly to reduce the degree of changes in real GDP. It is important to note that changes in expenditures and taxes that occur through automatic stabilizers do not shift the aggregate demand curve. Because they are automatic, their operation is already incorporated in the curve itself.
For example, the increase in defense spending in the early s under President Ronald Reagan and in the administration of George W. Bush were undertaken primarily to promote national security. That the increased spending affected real GDP and employment was a by-product. The effect of such changes on real GDP and the price level is secondary, but it cannot be ignored. Our focus here, however, is on discretionary fiscal policy that is undertaken with the intention of stabilizing the economy.
As we have seen, the tax cuts introduced by the Bush administration were justified as expansionary measures.
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