Countercyclical fiscal policy

Anti-cyclical fiscal policy is a fiscal policy strategy that uses its instruments to provide situationally targeted impulses for overall economic demand and thus tries to smooth the business cycle. In an economic downturn, it must have a stimulating (expansive) effect on the economy and in a boom it must act as a brake (restrictive). Countercyclical fiscal policy has its legal basis in the Stability and Growth Act of 1967.

Their instruments can be used either with government expenditure or with revenue: in a weak economic phase, public investment is expanded, in a boom phase, expenditure on consumption is cut.

Generell sind solche Konjunkturprogramme wirksamer als eine Lenkung durch Steuern. Denn Staatsausgaben wirken direkt auf den Economic cycle: Die staatliche Nachfrage kann erhöht oder gesenkt werden und schlägt in vollem Umfang bei den privaten Haushalten und Unternehmen zu Buche – selbst wenn ein Teil versickert, für mehr Importe ausgegeben wird und für die Binnenkonjunktur letztlich wirkungslos bleibt.

In contrast, the instruments on the income side, i.e. primarily taxes, have an indirect effect. If taxes are cut in a weak phase, private households and companies will have a higher disposable income. However, they only give some of this out again.

Another part is saved, and yet another part flows into import demand. This means that the desired impulse is correspondingly weaker. The same applies if taxes are increased during a boom.

Part of the higher taxes is financed by lower savings. This means that the braking effect is correspondingly weaker. However, spending programs are a relatively cumbersome tool as they often require discretionary decisions by governments and parliaments and often take time. Therefore, there is a risk that the programs will not work in time, maybe even come at the wrong time.

Taxes, on the other hand, work almost automatically. When wages, salaries and profits fall during an economic downturn, tax revenues also fall. Conversely, higher taxes have to be paid if incomes rise sharply. In this way, the cycle is partially automatically smoothed.

Together with cyclical expenditure, these instruments are therefore also known as automatic stabilizers, making them an essential part of countercyclical fiscal policy.

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