(v) Transfer payments:
Variation in transfer expenditure programs can also help in moderating the
business cycle. When the business is brisk, the government can refrain from
giving bonuses to the workers and thus can lessen the pressure of too great
spending to some extent. When the economy is in recession, these payments can be
released and more bonuses can be given to stimulate aggregate effective demand.
(2) Non Discretionary
Control:
Automatic or Built in
Stabilizers:
The automatic fiscal stabilizers are those which contribute to keep economic system in balance without human
control. These controls are built into the economy and so are called built in
stabilizers. The main automatic stabilizer is given below:
Progressive Income Tax:
Personal income taxes are the largest source of
revenue to the government. The tax rate, the individuals pay on their rising
income is progressive. When the disposable income of the people increases in the
boom period, the higher amount of tax reduces disposable income, reduces
consumption and decreases the aggregate demand which help in curbing economic
boom. A reduction in income tax increases disposable personal income, increases
consumption, increases aggregate demand and thus helps in curbing recession. The
expansionary and contractionary fiscal policies can be summed up and brought
under two approaches.
First: Demand Side Fiscal Policy.
Second: Supply Side Fiscal Policy.
(i) Demand side policy: It was originated as a direct result of Keynesian belief.
According to Keynes, during recession, the goal is to raise aggregate demand to
the full employment level. This objective may be achieved by (a) an increase in
government spending (G), (b) a decrease in tax revenue (T) brought about by
reduction in tax rates.
During a period of rapid inflation, the goal is to lower aggregate demand to
the full employment level. The fiscal policy will be (a) a decrease in
government expenditure (b) an increase in taxes brought about by rise in the
rates.
(ii) Supply side fiscal policy: It is a new approach to fiscal policy. The
modern economists are of view that fiscal policies can also influence the level
of economic activity through their impact on aggregate supply. When the firms
experience, an increase in resource costs due to a sharp rise in the world price
of a major raw material say oil, the higher costs causes a decrease in aggregate
supply creating a recessionary gap. Therefore, an expansionary fiscal policy in
the form of reduced corporate taxes and pay roll tax can help in closing the
recessionary gap. Conversely, an increase in the corporate tax rate and pay roll
tax etc., can help in closing the inflationary a gap.
(iii) Unemployment compensation: In advanced countries of the world, people
receive unemployment compensation and other welfare payments when they are out
of job. As soon as they get employment, these payments are stopped. When
national income is increasing, the unemployment fund grows due to two main
reasons: (a) The government receives greater amount of payroll taxes from the
employees and (b) the unemployment compensation decreases.
Thus, during boom years, the
unemployment compensation reserve funds help in moderating the inflationary
pressure by curtailing income and consumption. When the economy is contracting,
unemployment, consumption and other welfare payments augment the income stream
and they prove a powerful factor increasing income, output and employment in the
country. In the words of Samuelson:
"During boom years,
therefore, the unemployment reserve fund grows and exerts stabilizing pressure
against too great spending. Conversely, during years of slack employment, the
reserve funds are used to pay out income to sustain consumption and moderate the
decline".
(iv) Farm aid programs: Farm aid
programs also stabilize against the wave
like cyclical fluctuations. When the prices of the agricultural products are
falling and the economy is threatened with depression, government purchases the
surplus products of the farmers at the set prices. The income and total spending
of the agriculturists thus remain stabilized and the contraction phase is warded
off to some extent. When the economy is expanding, the government sells these
stocks and absorbs the surplus purchasing power. It, thus, reduces inflationary
potential by increasing the supply of goods and contracting the pressure of too
great spending.
(v) Corporate saving and family savings: The credit of having automatic or
built in stabilizer does not go to the state alone. The corporations and companies and wise family
members withhold part of the dividends of the
boom years to pay in the depression years. Thus holding back some earnings of
good years contracts the purchasing power and releasing of money in poorer years
expands the purchasing power of the people. Similarly, wise persons also try to
save something during the prosperous days in order to spend the savings in the
rainy days.
Limitation of built in stabilizers: The automatic or built in stabilizers can
no doubt minimize the upward and downward movements of business cycle to some
extent but they cannot help in achieving full employment without inflation. They
can be used as a first line of defense but they cannot cure the economic ills of
the society. So the policy makers have to be vigilant and adopt other suitable
fiscal measures which can counter cyclical fluctuation in the economy.
