- Discretionary fiscal policy
- Discretionary fiscal policy is when the government passes a new law that changes overall tax or spending levels, to influence the level of economic activity.
- Automatic stabilisers
- Automatic stabilisers are tax and spending rules that slow the fall in aggregate demand in a slowdown and restrain it in a boom, with no new legislation.
The three time lags in fiscal policy
Can you name the three time lags that delay fiscal policy?
Each one adds months between a slowdown starting and a policy taking effect.
The recognition lag is the time it takes to determine that a recession has occurred, because economic statistics take months to confirm a downturn.
Can you think of an example?
Output starts to fall in the spring, but the first official estimates are small and later revised, so it is autumn before the government is sure a recession has begun.
The legislative lag is the time it takes to agree a tax or spending change and pass it into law.
Can you think of an example?
A cut in income tax is announced in a Budget, debated and voted on in Parliament, and only then written into law, which takes months.
The implementation lag is the time it takes, once a policy is law, to get the money out and the projects started.
Can you think of an example?
Parliament approves extra spending on flood defences, but surveys, planning and contracts mean the diggers arrive a year or more later.