Page 253 - DECO402_Macro Economics

Macroeconomic Theory

Notes being given, tax receipts, along with movements in national income, change directly,
while government expenditure change inversely with changes in national income. When
national income falls in downward phase of trade cycle, which is based on the percentage of
national income, reduce them and as a result tax income reduces. Along with it, government
expenditure on unemployment relief and social security benefits increase automatically.
There will be an automatic loss in the budget which will stop deflationary trends. At the
other side in the upwards phase of trade cycle when national income rises fast then on an
increase in tax rates, tax receipts will increase automatically. Also government expenditure
on unemployment relief and social security benefits will decrease on its own. These two
forces will themselves build a surplus budget and in this way inflationary forces will be
controlled themselves.

Merits

In form of fiscal measure, built-in stabilisers have many merits. First, when personal purchasing power
falls then built-in stabilisers do the job of cushion for it and during deflationary conditions, they reduce
the difficulties of the people. Second, they stop the national income and consumption level from falling
at low level. Thirdly, in this measure budgetary changes are automatic and there is no delay in taking
administrative decision. Fourth, automatic stabilisers minimise the wrong forecasts and mistakes of
time of fiscal measures. Lastly, they unite the short term and long term fiscal policies.

Limitations
But in form of an automatic compensatory measure effectiveness of built-in stabiliser depends on the
flexibility of tax receipts, level of taxes and on flexibility of public expenditure. As much more will
be the flexibility of tax receipts that much more powerful will be automatic stabilisers in controlling
inflationary and deflationary trends. But flexibility of tax receipts is not so much that even in developed
countries like America they may do the job of automatic stabiliser; secondly when level of taxes is
low then during downswing in form of automatic stabiliser high flexibility of tax receipts also do not
have much importance. Thirdly, built-in stabilisers after giving tax do not think over the secondary
effects of trade-income stabilisers and consumption expenditure on trade expectations. Fourthly, this
measure is silent about the stabilisation effects of local bodies, state governments and personal fields
of the economy. Fifth, they cannot end trade cycles, they can only reduce their intensity. Sixth, their
effects are no favourable from recession to recovery. That is why, economists have suggested that from
discretionary fiscal policy of fiscal policy, built in stabilisers are substituted (anupoorit).

3. Discretionary Fiscal Policy

For discretionary Fiscal policy there is need for bringing such thoughtful changes in the budget like
changes in tax-rates or government expenditure or both. Generally it takes three forms. (i) change in
taxes, when expenditure stays stable (ii) change in expenditure, when tax stays stable, (iii) change in
tax and expenditure together.
First, when there is a deduction in taxes while no change is done in government expenditure, then
there is an increase in disposable income of this business and domestic area. Personal expenditure
increases by it. But increase in income depends on the fact in whose tax and to what extent deduction
is done and do the tax payers consider this deduction as permanent or temporary. If those attaining
profit from tax deduction are people of high middle income group then there will be an increase in
total demand. If it is related to low income group then there will be not much increase in their total
income. If traders have not motivation to invest, then tax deduction will not motivate them to invest.

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