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Automatic stabilisers

Automatic stabilisers are automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow during a recession or an increase in state welfare benefits when unemployment is rising.

Explanations for automatic stabilisers:

  1. Tax revenues: When the economy is expanding rapidly the amount of tax revenue increases which takes money out of the circular flow of income and spending.
  2. Welfare spending: A growing economy means that the government does not have to spend as much on means-tested welfare benefits such as income support and unemployment benefits.
  3. Budget balance and the circular flow: A fast-growing economy tends to lead to a net outflow of money from the circular flow. Conversely during a slowdown or a recession, the government normally ends up running a larger budget deficit During a recession, revenue is likely to be lower due to less income earned, less profits made and fewer goods being bought and at the same time government expenditure on transfer payments e.g. income support and unemployment benefit.

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