- Automatic stabilisers
- Automatic stabilisers are tax and spending rules already in law that stimulate aggregate demand in a recession and hold it down in an inflationary boom.
- Discretionary fiscal policy
- Discretionary fiscal policy is a deliberate government decision that explicitly changes the level of taxes or government spending.
The main automatic stabilisers
Can you name the three main automatic stabilisers?
Two taxes and one kind of spending move with the economy on their own.
Income tax is based on personal income, so receipts rise automatically when pay rises in a boom and fall when pay falls in a recession.
Can you think of an example?
A factory worker on £30,000 a year loses her job and stops paying income tax. Her spending falls by less than her lost pay, because the tax she no longer pays cushions it.
Corporation tax is based on company profits, so receipts rise automatically as profits grow in a boom and fall as profits shrink in a recession.
Can you think of an example?
A large builder's profit falls from £40 million to £10 million in a recession. At a 25 per cent rate its tax bill drops from £10 million to £2.5 million, leaving it more cash to keep staff on.
Out-of-work benefits are paid under rules already in law to people who lose their jobs, so spending on them rises with unemployment and falls as people find work.
Can you think of an example?
In a recession a million more people claim Universal Credit as they lose their jobs. The payments put income back into households, and nobody had to vote for the extra spending.