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What is Discretionary Fiscal Policy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 November 2016
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A discretionary fiscal policy is a monetary policy that is created and initiated by a government entity as a means of dealing with events and trends that are taking place in the economy. Typically, the idea behind this type of policy is to deliberately impact that trend, gradually moving the economy in a direction that is esteemed by government leadership as more beneficial to the jurisdiction. As part of the process, government spending in some areas may be trimmed while it is expanded in other areas, depending on what is required to help bring about the desired result.

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One example of how discretionary fiscal policy functions is to consider a nation that is entering into a period of economic recession. In order to slowly turn the situation around and bring about economic recovery, the national government will systematically implement a series of purchases and projects that will at first slow the rate of recession, then eventually restore some degree of stability to the economy. During the process, changes in tax structures may take place, and the government may create national work projects that hire employees displaced during the shutdown of companies in various industries. In some cases, financial aid is granted to specific industries, allowing them to continue operating without the need to lay off large numbers of employees. As a result of the discretionary fiscal policy, unemployment is incrementally reduced, consumer confidence begins to increase, and the economy is stimulated by the gradual upswing in consumer spending.

The usual goals of any discretionary fiscal policy are to create an unemployment rate that is as low as possible, maintain a desirable balance between supply and demand, and ensure some degree of stability on the prices of various goods and services while still supporting free enterprise among businesses. In this manner, governments seek to control the course of the economy and ease the nation away from extreme conditions that could undermine the infrastructure of the country. For this reason, the strategies involved will change, based on the current state of the economy and what must be done to move that economy in a more desirable direction.

It is important to note that in most cases, discretionary fiscal policy does not require the drafting of new laws or the need for some type of popular vote on a given issue. Instead, the government will make use of the powers already granted to the government to create and implement policy changes that are within the bounds of current laws and statutes. Those changes are implemented at the discretion of the government, often following a time line that is very specific in terms of when each change is initiated and what circumstances must offer in order for a given change to be placed into action.

While the goals of discretionary fiscal policy are often geared toward protecting the fiscal condition of both citizens and business within the nation by promoting a more stable economy, the processes used are only as good as the assumptions made by those who develop those policies. Should a given policy change not produce the desired results, the need to adjust the plan in some manner will quickly be apparent. Often, this becomes necessary when some factor that was otherwise not readily recognizable is discovered during the process, making it necessary to amend the overall economic plan to respond to the changed economic circumstances.

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ZipLine
Post 3

@ddljohn-- Have you heard of "automatic stabilizers?" These are changes in taxes based on income that take place automatically depending on income variations. These are non-discretionary fiscal policies and take effect immediately.

discographer
Post 2

@ddljohn-- There is definitely a time lag but since most of discretionary fiscal policies are preventative in nature, they are mostly very effective.

Discretionary fiscal policies are actually a great way to stabilize the economy. If they're used correctly, these policies can help the government can sustain a good economic growth rate.

The only issue with discretionary fiscal policy is that it's dominated by party politics. Sometimes Congress puts in place Expansionary fiscal policies that are not economically sensible, because its beneficial politically. This is the major problem in my view.

ddljohn
Post 1

I understand what discretionary fiscal policy refers to, but do these policies really work?

As far as I know, there is considerable time lag in fiscal policies. Between the realization that things are going wrong, to implementing changes in spending, taxes or projects, it takes a very long time. After all, fiscal policies come out of a bureaucratic system and bureaucracy is always slow.

How many of discretionary policies are put in place in time to make a difference?

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