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Automatic vs discretionary stabilisers


Automatic vs discretionary stabilisers are also referred to as the cyclical and structural components of the budget.


Any time the federal government decides to change the way it collects money or makes payments (composition of receipts/payments) or adjust the volume of its receipts/payments (level of receipts/payments) it will typically impact on the size of the budget outcome (e.g. increase or decrease the surplus/deficit).  This change in the budget outcome reflects a deliberate attempt (i.e. an actual policy decision) to use the budget to change the allocation of resources or assist with the achievement of its goals.  In this respect, the actual 'structure' of the budget is deliberately altered by the government.  This represents the structural component of the budget and changes of this nature are sometimes referred to as discretionary stabilisers.  For example, the expenditure on school reforms introduced in the 2013-4 budget is an example of a discretionary stabiliser that works to increase the size of the budget deficit.


Clearly, the structural changes (or discretionary stabilisers) do not account for all the changes in budget outcomes.  This is because the budget outcome also changes automatically in response to changes in the level of economic activity.  Lower levels of economic activity should negatively impact on the budget outcome as receipts from taxation (primarily individual and company taxes) are likely to fall and the payments for government services or transfer payments (such as unemployment benefits) should increase.  In essence, the budget outcome will change in line with the economic cycle, with the surplus falling during downturns and increasing during recoveries.  This represents the cyclical component of the budget and is sometimes referred to as automatic stabilisers.  For example, a reduction in the amount of tax actually received by the government (as distinct from a change in the tax rate) will tend to reduce receipts relative to expenditure and therefore result in an automatic increase in the size of the deficit.  


These cyclical stabilisers help the budget to automatically respond to changing economic conditions by slowing growth rates during periods of high economic activity (e.g. booms), as the budget moves into greater surplus, and slowing the rate of decline during periods of low or negative growth (e.g. a recession), as the size of the surplus falls.  This is highlighted in the diagram below:






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