Automatic Stabilizer

Automatic stabilizers work because tax revenues and some types of spending change naturally with economic conditions.

During a recession, incomes and profits fall, so income and corporate tax revenues fall too, leaving more money with households and businesses. At the same time, more people qualify for unemployment and other benefits, so government spending rises. Both effects support demand. During a boom, the opposite happens: tax revenues rise and benefit spending falls, cooling demand.

For example, a worker who loses their job pays less income tax and starts receiving unemployment benefits, so their spending falls less than it would otherwise.

Automatic stabilizers act quickly, since they require no legislation, and they are larger in countries with progressive tax systems and generous benefits. They are one reason budget deficits widen during recessions. Economists distinguish them from discretionary fiscal policy, which involves deliberate decisions to change taxes or spending.