That outcome marked the fourth consecutive year that automatic stabilizers added to the deficit by an amount equal to or exceeding 2.0 percent of potential GDP, an impact that had previously been equaled or exceeded only twice in the past 50 years, in fiscal years 19. The CBO reports: "In fiscal year 2012, CBO estimates, automatic stabilizers added $386 billion to the federal budget deficit, an amount equal to 2.3 percent of potential GDP. #AUTOMATIC STABILIZERS FISCAL POLICY CODE#These effects are built into the design of the tax code and into the design of safety net programs. Conversely, the unemployed and underemployed are making lower income tax payments than they would have made if employed. Indeed, a number of tax and spending programs adjust this way automatically, without the passage of legislation, and thus are know as "automatic stabilizers." The Congressional Budget Office has published a short primer: " The Effects of Automatic Stabilizers on the Federal Budget as of 2013."įor example, during the sluggish aftermath of the Great Recession, more people are drawing unemployment benefits, and relying on programs like Food Stamps and Medicaid. Conversely, when an economy is running red-hot, it's a good time for the government to slow down demand with some combination of tax increases or spending cuts. Thus, when an economy is in recession, it's a good time for the government to prop up demand with some combination of tax cuts or spending increases. Standard macroeconomic theory suggests that a central government can ameliorate swings in the business cycle through fiscal policy.
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