DISCRETIONARY FISCAL POLICY Meaning and
Definition
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Discretionary fiscal policy refers to the deliberate use of government spending and taxation measures to regulate and stabilize the economy. It is a policy tool available to the government that allows them to adjust spending and taxation levels according to the current economic conditions and policy objectives. Unlike automatic stabilizers, which are predetermined and automatically adjust based on economic fluctuations, discretionary fiscal policy requires an active decision from policymakers.
This policy enables the government to respond to economic downturns or expansions by increasing or decreasing spending, as well as by raising or lowering taxes. During periods of economic recession, for example, the government may implement expansionary fiscal measures, such as increasing spending on infrastructure projects or providing tax cuts, to stimulate economic growth and boost consumer spending. Conversely, during times of high inflation or economic overheating, contractionary fiscal policies may be implemented, involving reducing government spending or increasing taxation to control inflationary pressures and limit excessive economic growth.
The discretionary nature of this policy allows governments to respond to various economic challenges, such as unemployment, inflation, or economic stagnation. It requires careful analysis and decision-making by policymakers to effectively use fiscal policy tools without any predetermined rules or limitations. Therefore, discretion is an essential aspect of this policy, enabling governments to enact timely measures to address economic concerns and promote overall economic stability and growth.
