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What Is Countercyclical Fiscal Policy?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 02 September 2016
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Countercyclical fiscal policy goes against the current norm in the economy. For example, in a slow economy, a countercyclical action would be meant to help encourage an upswing. It is a government effort which is implemented through taxes and various kinds of policies. This type of policy can be administered for isolated situations or as an ongoing means of controlling the effect of business on the economy.

The primary purpose of ongoing countercyclical fiscal policy is to manage the effect of fluctuations in the economy. These kinds of policies are known as automatic stabilizers. They are used to take advantage of the wealth generated in a strong economy and to mitigate the effect of a weak market so that the country will not fall into a depression. Ongoing policies are also intended to help an economy avoid the disruption of large shifts in wealth.

Countercyclical fiscal policy can also address isolated issues in the economy. It can be used to attempt to prevent imbalances that can cause problems, such as when inflation outpaces unemployment. The goal is to maintain a certain output, which is affected by job growth, inflation, and the general health of the economy.

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Factors that can affect the effectiveness of countercyclical fiscal policy include timeliness, the scope of the policy, and the citizens’ reactions. If a policy is introduced too late, it can exacerbate the problem it is meant to remedy. When a fiscal policy is too dramatic or not bold enough, it can also destabilize the economy. In some cases, citizens may not react as desired. For example, while a significant tax refund may be meant to stimulate the economy, there is the risk that citizens who are unnerved by the poor economy will save the money rather than increasing spending.

A common kind of ongoing countercyclical policy is progressive taxation. This is a system in which the percentage of taxes on income increases with the rise of the economy. An increase in taxes tends to decrease demand, which helps to ensure that the rise in prosperity will not be too dramatic. This policy can be applied to an entire population or to people at a certain income level.

There are some who believe that countercyclical fiscal policy tends to risk the stability of an economy. These people are wary of excessive government intervention in the economy. They feel that the cycle of supply and demand provides adequate controls for a thriving economy.

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ysmina
Post 3

We were talking about this in class today, as part of Keynesian economics. As far as I understand, these policies were created to help protect the national economy from negative changes in the global economy. It's basically government intervention. Free market proponents are not a fan of these policies.

candyquilt
Post 2

@SarahGen-- I'm not an economy expert but I think that countercyclical fiscal policies may be automatic or discretionary.

Countercyclical simply means that a fiscal policy has the opposite effect on the general direction of the economy. So if an economy is very slow, a countercyclical policy will speed it up. If an economy is growing too quickly, a countercyclical policy will slow it down. This is in contrast to procyclical policies that speed up an already growing economy or slow down an already slow economy.

Discretionary fiscal policies, on the other hand, are policies that the government uses discretion to implement. This is the opposite of automatic policies like policies that automatically increase tax when income increases.

So a counterycylical fiscal policy may be an automatic one or a discretionary one. Does this make sense?

SarahGen
Post 1

So what is the difference between countercyclical fiscal policy and discretionary fiscal policy? They sound the same to me.

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