COUNTER CYCLICAL FISCAL POLICY

COUNTER CYCLICAL FISCAL POLICY

Subject : Economics

Context : CEA says it is time to switch fiscal gears from cautious stance to ‘counter-cyclical’ push.

Concept :

• Counter-cyclical fiscal policy refers to the steps taken by the government that go against the direction of the economic or business cycle.
• Thus, in a recession or slowdown, the government increases expenditure and reduces taxes to create a demand that can drive an economic boom.
• On the other hand, during a boom in the economy, counter-cyclical fiscal policy aims at raising taxes and cutting public expenditure to control inflation and debt.

Pro-cyclical fiscal policy

• In a pro-cyclical fiscal policy, the government reinforces the business cycle by being expansionary during good times and contractionary during recessions.
• Pursuing a pro-cyclical fiscal policy is generally regarded as dangerous. It could raise macroeconomic volatility, depress investment in in real and human capital, hamper growth and harm the poor, say economists.