3. Fiscal policy is the use of government
spending and taxation to influence the
economy. Governments typically use fiscal
policy to promote strong and sustainable
growth and reduce poverty.
What is
Fiscal policy?
5. Contracyclical fiscal policy cuts government spending and
increase taxes during economic prosperity, and increase
spending while cutting taxes during recessions. The recessions
the government can run an expansionary fiscal policy, thus
helping to restore output to its normal level and to put
unemployed workers back to work.
Contracyclical Fiscal Policy
6. Automatic stabilisers!
One form of countercyclical fiscal policy is also known as automatic
stabilizer’s. Automatic stabilizers are mechanisms built into
government budgets, without any vote from legislators, that increase
spending or decrease taxes when the economy slows. During a
recession, automatic stabilizers can ease households’ financial stress
by decreasing their tax bills or by boosting cash and in-kind benefits,
all without changes in the tax code or any other new legislation. For
example, when a household’s income declines, it generally owes less in
taxes, which helps cushion the blow. Additionally, with a decline in
income, a household may become eligible for unemployment insurance
(UI), food stamps (Supplemental Nutrition Assistance Program, or
SNAP), or Medicaid. Automatic stabilizers don’t just help families facing
financial difficulties—they also help the overall economy by
stimulating aggregate demand when times are bad and when the
economy is most in need of a boost. When times are better, automatic
stabilizers generally phase down or turn off. Most automatic stabilizers
are federal; states and localities are generally required to balance their
budgets, so they can’t run big deficits during downturns.
7. Corporate
Income Tax
Personal
Income Tax
Unemployment
Insurance Program
Examples
Taxes on corporate profits
go up substantially during
boom times, and decline
rapidly during times of
recession.
Progressive taxation pushes people
into higher income tax brackets
during boom times, substantially
increasing their bill and reducing
government budget deficits. During
recession, many individuals fall into
lower tax brackets or have no income
tax liability. This increase the size of
the government budget deficit.
This programme provides payments
to greater number of people as
unemployment increase during
times of recession. At the same
time, the taxes that contribute to
UI will go down as employment
decreases. These two effects will
cause the government budget
deficit to increase. During boom
times, the programme will
automatically produce surpluses or
reduce deficits.
