Fiscal policy has a stabilizing effect on an economy if the budget balance—the difference between expenditure and revenue—increases when output rises and decreases when it falls. For instance, if output suddenly contracts, policymakers can let tax revenues fall along with income (or even deliberately cut tax rates) and let unemployment benefits increase with the number of unemployed. This maintains income and purchasing power for individuals, and supports demand. Policymakers can also raise demand directly by deliberately spending more. Either way, higher deficit (or a lower surplus) effectively cushions the blow on output.
http://blog-imfdirect.imf.org/2015/04/08/growth-dividend-from-stabilizing-fiscal-policies/
ISSUE: Fiscal policy and stabilization
STABILIZATION EFFECT: In order to use fiscal policy as a stabilizing factor int he economy, policymakers must know when to apply which type of fiscal policy. There are three types of fiscal policies depending on the state of the economy and government budget conditions: (i) Neutral fiscal policy; (ii) expansionary fiscal policy; and (iii) contractionary fiscal policy.
(i) Neutral fiscal policy: The budget is fully funded; the budget is balanced. The effect on the economy is neutral.
(ii) Expansionary fiscal policy: The government engages in deficit spending. This is accomplished in time of recession under the assumption that government spending would stimulate growth and thus pull the economy out of recession.
(iii) Contractionary fiscal policy: The government try to keep a budget surplus in order to pay down government debt. this policy is used when the economy is doing well and there is an access budget. See Bill Clinton's administration int he mid-1990s: http://www.newrepublic.com/blog/jonathan-chait/76709/who-created-the-1990s-surplus-clinton-or-the-gop
STABILIZATION: Stablization may be accomplished when the above three fiscal policy tools are used at the right time. These three different policy tools may not be used at the same time; each is different from one another and may be used under different condition.
http://www.newrepublic.com/blog/jonathan-chait/76709/who-created-the-1990s-surplus-clinton-or-the-gop
Both excessively deficit budgeting and excessive surplus budgeting are bad for stabilization.
Right balance and right timings are important.
Dear colleague,
From my experience of fiscal debates in Latin America the issue of the automatic stabilizers can be crucial. These are, for instance, unemployment schemes and other welfare spendings on the expenditure side, or progressive income taxes on the revenue side. Automatic stabilizers are an important feature to build resilience against exogenous shocks, and they have the additional advantage of avoiding short-term policy responses which sometimes rather undermine fiscal credibility.
Fiscal policy has a stabilizing effect on an economy if the budget balance—the difference between expenditure and revenue—increases when output rises and decreases when it falls. For instance, if output suddenly contracts, policymakers can let tax revenues fall along with income (or even deliberately cut tax rates) and let unemployment benefits increase with the number of unemployed. This maintains income and purchasing power for individuals, and supports demand. Policymakers can also raise demand directly by deliberately spending more. Either way, higher deficit (or a lower surplus) effectively cushions the blow on output.
http://berensztein.com/how-can-we-use-fiscal-policies-to-stabilise-the-economy/
Keynes has a very good and modern position about this.
He proposed to Britain after the 2nd World War a kind of public budget segregated in two sub-budgets, the current and the capital budgets. The first one would have to furnish the public services to the population. The second one was responsible for automatically stabilize the economic cycle by means of either fostering or cooling down public investments, depending on the phase of the cycle. Keynes' idea, moreover, was that automatic stabilizer should not be used as a last resort tool, but as a way to avoid the cycle. It is best to keep the system without large fluctuations in the GDP trend, otherwise the uncertainty regarding the future would increase a lot and bother the long term output potential. See more on this in this article: http://www.redalyc.org/articulo.oa?id=60124637003
All the best.
Some of the essential objectives of fiscal policy are: 1. Fiscal Policy for Full Employment, 2. Economic Stabilization, 3. Economic Growth, 4. Social Justice!
Thanks Dr.Fábio Henrique Bittes Terra ,Dr.Christian Von Haldenwang and Dr.Renzo Bianchi .These are excellent answers and the skill and expertise for each of you is highly evident.
Thanks Dear Boudiaf Mohamed, in fact I asked this questions after I read this article.Thank you again
What is a 'Stabilization Policy'
A stabilization policy is a macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by gross domestic product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well.
Read more: Stabilization Policy Definition | Investopedia http://www.investopedia.com/terms/s/stabilization-policy.asp#ixzz4RJOHZrbT
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It seems to me that we do not have an answer, particularly in the last 3 decades (in a globalized economy). Simply, look at all economic crisis! Where are the stabilizers? Cycles are a rule in the capitalism, and we should focus on technological change and innovation, in the long-term.