Automatic and Discretionary Stabilisers Flashcards
Automatic (Cyclical) Stabilisers
The budget has an ‘in-built’ stabilisation mechanism.
These stabilisers:
- Speed up the economy when economic growth is too slow
- Slow down economic growth when the economy is growing too fast.
Automatic stabilisers work without government intervention
Automatic Stabilisers on AD in Expansion
In an expansion:
- Tax revenue collected will increase (due to the progressive nature of our income tax system and higher company revenues in periods of economic growth)
This increases leakages out of the circular flow models. –> Slows AD growth, thus automatically stabilising the business cycle.
- Welfare outlays will decrease as a lower UE rate means less people qualify for payments like JobSeeker
This decreases injections into the circular flow model. –> Slows down AD growth
Automatic Stabilisers on AD in Contraction
- Tax revenue collected will decrease
This decreases leakages out of the circular flow model. –> Slows drop in AD - Welfare outlays will increase
This increases injections into the circular flow model. –> Slows drop in AD
Aim of Automatic Stabilisers
They smooth out the business cycle without government intervention.
- Cools a hot (booming) economy
- Stimulate a slowing (contracting) economy
Other Automatic Stabilisers
- Commodity Prices
- Company taxes
- GST
Examples of Automatic Stabilisers working
Tax Revenue from Commodity Prices: As the economy improves and commodity prices rise, tax revenue from these commodities increases without any change in tax policy.
Welfare Payments: As the economy recovers post-pandemic and unemployment decreases, there’s a corresponding decrease in welfare payments.
Discretionary (Structural) Stabilisers
Any time the government makes a deliberate change to the structure or composition of the budget
Examples:
- Removes a tax bracket
- Decreases spending on infrastructure
Discretionary Stabilisers on AD in Contraction
In theory, the government should use these stabilisers to smooth out the business cycle.
In a contraction, the government could:
- Decrease the income tax rate to increase disposable income and increase ‘C’ and AD overall.
- Increase spending on infrastructure projects to increase the G2 component of AD and increase AD overall.
Discretionary Stabilisers on AD in Expansion
In theory, the government should use these stabilisers to smooth out the business cycle.
In an expansion, the government could:
- Decrease spending on infrastructure projects to decrease the G2 component of AD and decrease AD overall.
- Increase the income tax rate to decrease disposable income and slow ‘C’.
Other Discretionary Stabilisers
- Removal / Changing tax brackets
- Increasing/decreasing welfare payments / eligibility
- Business tax cuts (write-offs)
- Easing costs of living pressures
The Impact of Automatic Stabilisers on Budget Outcome / Debt during a Contraction
During a contraction the Automatic (built-in) stabilisers will:
- Increase the level of welfare spending into the economy (increase government expenses)
- Decrease the level of income tax collected (decrease government revenues)
- Thus increase the deficit/bring closer to deficit from surplus.
The Impact of Automatic Stabilisers on Budget Outcome / Debt during a Expansion
During an expansion the Automatic (built-in) stabilisers will:
- Decrease the level of welfare spending into the economy (decreasing government outlays)
- Increase the level of income tax collected (increasing government revenues)
This will either:
- Decrease the deficit
- Increase the surplus
Impact of Discretionary Stabilisers on Budget Outcome / Debt during an Expansion
During an expansion, the government will use discretionary stabilisers to:
- Decrease the level of (G1 + G2) spending in the economy = decreasing spending
- Increase the income tax rate = increasing revenues
This will either:
Decrease the deficit =increase debt
Increase the surplus= decreasing debt
