Question

What are some limitations of discretionary fiscal policy in combating a recession? What about automatic fiscal policy?

Answer 1

Answer Proper timing is crucial to apply discretionary fiscal policy to combat recession .Some of the practical problems that reduce the effectiveness of discretionary fiscal policy to control recession is having administrative lag, recognisition lag and inadequacy in fiscal measures

Recognisition lag- There is gap in time the action is needed and when it is recognized by government that action is needed. Such a lag has duration of 3 months. And due to that at appropriate time recession controlled activities do not apply.

Administrative lag- It is the time difference between action is needed and the time when the action is actually taken by government .Such a lag has duration of 1 to 15 months.

inadequacy in fiscal measures - It means that at recession government knows it can be controlled with increase in spending and deduction in taxes. But it needed in sufficient amount. If the spending and tax deduction is more or less, then adverse impact can be seen.

Automatic fiscal policy- Automatic stabilizer is a type of fiscal policy applied to control fluctuations in economic activities via their normal operations without additional and timely working by the government to attain stability.