Counter cyclical fiscal policy

Subject: Economy

Context:

Think tanks want government to pursue a counter-cyclical fiscal policy when the economy faces its worst recession with millions of job losses in the wake of the Covid-19 pandemic, and the subsequent strict national lockdown.

Concept:

• A counter-cyclical fiscal policy refers to strategy by the government to counter boom or recession through fiscal measures.
• It works against the ongoing boom or recession trend; thus, trying to stabilize the economy. Understandably, countercyclical fiscal policy works in two different direction during these two phases.
• Countercyclical fiscal policy during recession
  • Recession is a business cycle situation where there is slowing demand and falling growth in the economy.
  • Here, the Government’s responsibility is to generate demand by fine-tuning taxation and expenditure policies.
  • Reducing taxes and increasing expenditure will help to create demand and producing upswing in the economy.
• Countercyclical fiscal policy during boom
  • In the case of boom, economic activities will be on upswing.
  • Amplifying the boom is disastrous as it may create inflation and debt crisis and the government’s responsibility here is to bring down the pace of economic activities. Increasing taxes and reducing public expenditure will make boom mild.
  • Thus, slowing down demand should be the nature of countercyclical fiscal policy during boom.