Qu'est-ce que la politique budgétaire automatique? Qu'est-ce que la politique budgétaire discrétionnaire? (document en anglais)

What is automatic fiscal policy? What is discretionary fiscal policy?

Generally speaking, fiscal policy is the use of government spending and taxation in order to influence aggregate demand and therefore the level of economic activity. Aggregate demand is the total level of planned expenditure in an economy and is calculated by adding four demand sources:

AD= C + I + G + (X-M)

Where C = consumption, I = investment, G = government spending, X = export and M = import.

For instance, a tax cut will have an indirect influence on aggregate demand by increasing consumption and investment whereas an increase in government spending will directly influence aggregate demand.

In a recession (which requires budget deficit), an expansionary fiscal policy involves lowering taxes and increasing government spending. In an expansion (which requires budget surplus), a contractionary fiscal policy requires higher taxes and reduced spending.

Changes in fiscal policy involve changes in the government budget: increasing government spending and decreasing tax rates result in budget deficits whereas the opposite results in budget surplus.

There are two tools of fiscal policy:

- Discretionary fiscal policy, which is a deliberate change in direct and indirect taxation and government spending.

- Automatic fiscal policy, which is an automatic change in tax revenues and government spending occurring when the economy moves through different stages of the business cycle.

As previously mentioned, these changes influence the federal budget. We are going to focus on how these policies affect the government budget, when they are used and what are their economic consequences.

Automatic fiscal policy automatically expands fiscal policy during recessions and contracts it during booms. It is one form of countercyclical fiscal policy.

During economic growth, the amount of tax revenue increases because the amount of taxes collected is proportional to wages and profits.

Moreover, welfare benefits such as income support or unemployment benefits are significantly reduced as a fast-growing economy implies lower rates of unemployment and job insecurity (G decreases).

In a recession the opposite occurs: taxes decrease and benefits increase.

Another characteristic of automatic fiscal policy is that an economy which is expanding rapidly tends to lead to a net outflow of money from the circular flow.

Automatic fiscal policy is also called automatic stabilizer because it dampens fluctuations in GDP. Indeed, in boom times, increased taxes reduce money supply. Conversely, in recession times, the welfare system injects more money in the system and stimulates demand.

Example: GDP and automatic stabilizers in the United States between 2009 and 2011:

Estimates from economists at the OECD have found that the effects of the automatic stabilizers of fiscal policy can reduce the volatility of the economic cycle by up to 20%.

Discretionary fiscal policy implies government action and often

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