Fiscal Policy

Automatic and Discretionary Stabilisers

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Christian Bien

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Automatic Stabilisers
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Automatic stabilisers is where the Government does not need to take any action and that changes to the budget outcome are done automatically without intervention. Welfare and income taxation receipts are cyclical in nature and influence the budget outcome without government intervention. - During booms and upswings, more people are employed and earning higher incomes, thus increasing income tax receipts and lowering welfare expenditure, positioning the budget towards a surplus. - During troughs and downturns, fewer people are employed and wage growth is slow, hence, income tax receipts are lower and welfare expenditure is higher, positioning the budget towards a deficit

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Discretionary Stabilisers
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Discretionary stabilisers are changes to government revenue and expenditure to directly influence the budget outcome. Some examples of discretionary stabilisers include: 

  • In 2009, the Rudd Government released the 'Nation Buildings and Jobs Plan' with $42 billion in stimulus fiscal spending (read Wayne Swan's media release by clicking here) 

  • Malcom's tax cut for Australians earning over $80,000 

  • 2016 Small Business tax cut to 27.5% 

  • Infrastructure projects - e.g National Broadband Network 

  • Additional funding to Defence to a budget of $32.3 billion in 2016

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The effect of fiscal policy on the business cycle can be shown in the model above. Fiscal policy is counter-cyclical to which it stabilises the level of economic activity towards trend level to avoid the negative effects of too much or too little economic activity. Automatic stabilisers are first shown reducing the level of economic activity during booms and upswings and increasing the level of economic activity during periods of downturns or troughs. This shows a stabilising effect of fiscal policy. The stabilising effect is further shown through the use of discretionary stabilisers which further moves economic activity towards the trend level. It is impossible to get the level of economic activity at the trend level due to the role of private spending that tends to outweigh the effect of fiscal policy.

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