In macroeconomics automatic stabilisers work as a tool to dampen fluctuations in real GDP without any explicit policy action by the government. It is a government program that changes automatically depending on GDP and a person’s income, and acts as a negative feedback loop on GDP.
Usage examples
"There is potential from the liquidity policy that we are now bringing in to have some impact, not as a discretionary incremental tool like an official cash rate, but more as an automatic stabilizer over the cycle," Bollard told the committee on…
Nov 26, 2009 – Bloomberg – Alan Bollard
Induced taxes
The size of the government deficit tends to increase as a country enters recession, which may keep national income higher through the multiplier if such an effect exists.
Government tax revenue tends to fall as a proportion of national income during recessions.
This occurs because of the way tax systems are generally constructed.
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Income tax is generally at least somewhat progressive. If an individual’s income rises, then their average tax rate increases. This means that as incomes fall, households pay less as a proportion of their income in direct taxation.
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Corporation tax is generally based on profits, rather than turnover. In a recession profits tend to fall much faster than turnover. Therefore, a corporation pays much less tax while having only slightly less economic activity.
If national income rises, by contrast, then both households and corporations end up paying higher proportions of their income in tax.
This means that in an economic boom tax revenue is higher and in a recession tax revenue lower; not only in absolute terms but as a proportion of national income.
Other forms of tax do not exhibit these effects, because they are roughly proportionate to income (e.g. taxes on consumption like sales tax or value added tax, or they bear no relation to income (e.g. poll tax or property tax).
Transfer payments
Most governments also pay unemployment and welfare benefits. Generally speaking, the number of unemployed people and those on low incomes who are entitled to other benefits increases in a recession and decreases in a boom.
This means that government expenditure increases automatically in recessions and decreases automatically in a boom in absolute terms. Since the trend of output is to increase in booms and decrease in recessions, expenditure is expected to increase as a share of income in recessions and decrease as a share of income in booms.
When stabilizers don’t work
There is broad consensus among economists that the automatic stabilizers often exist and function in the short term.
However, the automatic stabilizers model does not incorporate rational expectations or other microfoundations. No part of economics is in the final analysis a mechanistic process and the existence of the stabilizers can easily be overshadowed by other changes to policy, expectations or markets.