Countercyclical fiscal policy
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
Countercyclical fiscal policy moves against the business cycle, which is the regular rise and fall of economic activity. In a slump, the government spends more or cuts taxes to support demand. In a boom, it spends less or saves to cool demand and control inflation. This smooths out the ups and downs of output and employment. It works partly through automatic stabilisers (such as income tax and welfare payments, which adjust on their own) and partly through deliberate discretionary decisions.
Example
During the 2008-09 Global Financial Crisis, India cut excise and service taxes and paused its FRBM targets. The Centre's fiscal deficit rose to about 6% of GDP to support demand. In the COVID period (2020), recovery was supported by higher capital expenditure.
Don't confuse with
- Procyclical fiscal policy: this moves with the cycle. The government spends more in booms and tightens in slumps, so the swings get bigger.
Related concepts
- Automatic stabiliser
- Discretionary fiscal policy
- Procyclical fiscal policy
- Fiscal stimulus
- Fiscal space
- Austerity
- Fiscal drag
- Structural deficit