Discretionary & Non-Discretionary Policy

Discretionary/Structural: this refers to deliberate actions taken by the government to smooth out fluctuations in the business cycle, G or T.

For example: changing the marginal income tax brackets or rate, spending money on infrastrcutre.

These are also known as structural policies as they have a structural impact on the budget outcome.

THINK: D for discretionary as D for deliberate.

Non-Discretionary/Cyclical: this refers to changes in G or T as a result of changes in the business cycle.

For example: during an upturn the government will collect more tax due to the higher levels of Y and C that lead to brack creep.

These happen as they are built into the fiscal framework, which naturally act counter-cyclically, known as automatic stabilisers.

Automatic Stabilisers: built-features of the fiscal framework that automatically adjust to G and T to offset economic fluctuations (in the business cycle) without requiring deliberate legislative action.

If automatic stabilisers (ND FP) are a cyclical factor to help smooth out fluctuations in the business cycle, why does the government have to use discretionary FP in the mdeium term to target levels of AD?

The government must implement deliberate (discretionary) action as automatic stabilisers do not always do enough to counteract fluctuations, or result in an outocme that is socially undesirable. For example, during the COVID-19 recession, automatic stabilisers would have automatically lowered the elvels of tax revenue due to the decrease in consumption and levels of income from consumers. Despite this, there would not be enough money or economic activity due to the lockdowns and restrictions of COVID-19. Due to this the government took deliberate action spending $314 billion to ocunteract this recessionary period of time in which they delivered money to the lowest income earners who have the highest marginal propensity to consume.