Penleigh and Essendon Grammar School Eco Unit 4 Lesson June 10 ADP
Two important features of how a Federal /State budget operates are found in the use of Automatic and Discretionary Stabilizers.
AUTOMATIC STABILIZERS
They can also be know as cyclical components of a budget operate automatically to smooth out fluctuations in the level of economic activity; to take the top off the boom and to reduce the intensity of a slow down.
Basically as an economy starts to slow down in activity, parts of the budget will automatically start to kick in to compensate for the slow down. . In sum it provides the means by which extra spending and less taxation will be taken out of individuals or companies whose income or profits have started to diminish due to the slow down in activity.
Consequently when the economy is on the slied it can be presumed that the following could take place:
1.
Unemployment increases. Therefore these people will automatically receive unemployment benefits once they register for benefits. This welfare benefit provides immediate income for those in need. It provides a basic income to spend on goods and services. What we are seeing is Government outlays increasing automatically to assist those in need.
2.
Because the economy is in a slow down it could also be assumed that the amount of hours being worked may also drop . In fact some staff may be forces to drop from full time to part time work. Through the mechanism of the progressive tax system individuals faced with this scenario will automatically start paying less tax because their income has fallen. Individuals start to fall below certain tax brackets which means they have more money to spend than would have been the case had they not moved down a tax bracket.
3.
Government revenue decreases and the budget would be pushed into a cyclical deficit.
To conclude Automatic stabilisers are an anti-cyclical response by the budget.
Discretionary or structural components represent deliberate changes made by the government to outlays or revenue.
For example if the economy is slowing and the government is concerned that the automatic stabilisers have not had the desired effect, further stimulation may be necessary.
1.
Initiate increases in government expenditure. Spend more money on building more schools, more roads and the like. The effect is to increase outlays.
2.
Reduce rates of taxation by reducing the PAYE tax rates, reduce company tax rates or reduce indirect tax rates. The effect is to decrease the revenue paid to governments providing members of the economy with more spending power.

Penleigh and Essendon Grammar School Eco Unit 4 Lesson June 10 ADP
Basically the aim of increasing the structural component is to increase economic activity, often referred to as a Keynesian pump-priming exercise.