AUTOMATIC FISCAL STABILIZERS Meaning and
Definition
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Automatic fiscal stabilizers refer to a set of government policies and programs that are designed to help stabilize the economy during periods of economic volatility or recession without requiring explicit legislative action. These stabilizers are typically built into the structure of the fiscal system and operate automatically based on pre-determined rules.
One example of automatic fiscal stabilizers is progressive income taxation. The tax system is designed in a way that higher-income individuals pay a higher rate of taxes. During periods of economic expansion, incomes and tax revenues increase, allowing the government to collect more tax revenue. Conversely, during a downturn or recession, incomes and tax revenues decline, and the tax burden on individuals decreases automatically, thus providing them with more disposable income to spend and stimulate economic activity.
Another example of automatic fiscal stabilizers is unemployment insurance. During times of high unemployment, more individuals become eligible for unemployment benefits. This helps to provide a safety net for those who lose their jobs, ensuring that they have some level of income to support themselves and their families. Furthermore, the government's expenditure on unemployment benefits increases automatically during recessions, injecting additional money into the economy and providing an economic stimulus.
Overall, automatic fiscal stabilizers are an essential component of fiscal policy as they help to maintain economic stability and mitigate the negative impacts of economic downturns without the need for discretionary government intervention.
