Procyclical fiscal policy
Also called: Procyclical policy · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
Procyclical fiscal policy moves in the same direction as the business cycle. In a boom, the government spends more or cuts taxes because revenue is flowing in. In a slump, it cuts spending or raises taxes because revenue has fallen. This makes the cycle stronger: booms overheat and slumps get deeper. It is common in developing countries. It is also common under rigid deficit rules that force cuts when revenue falls in a downturn.
Example
After 2010, the eurozone countries, including Greece, cut spending in the middle of a recession to meet deficit and debt goals, and the recession got deeper. A rigid fiscal rule with no escape clause can force this kind of response.
Don't confuse with
- Countercyclical fiscal policy: this does the opposite. It spends in slumps and saves in booms to smooth the cycle.
Related concepts
- Automatic stabiliser
- Discretionary fiscal policy
- Countercyclical fiscal policy
- Fiscal stimulus
- Fiscal space
- Austerity
- Fiscal drag
- Structural deficit