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Non-discretionary fiscal policy

Definition

Non-discretionary fiscal policy refers to government spending and taxation policies that are automatically triggered by changes in the economy, without requiring new legislation. These policies are typically designed to stabilize the economy during economic downturns or expansions.

Analogy

Think of non-discretionary fiscal policy as an automatic thermostat for the economy. Just like a thermostat adjusts the temperature in your home based on changes in the room, non-discretionary fiscal policy automatically adjusts government spending and taxes based on changes in the economy.

Related terms

Automatic stabilizers: These are specific components of non-discretionary fiscal policy, such as unemployment benefits or progressive income taxes, that automatically increase during recessions and decrease during expansions.

Fiscal drag: This term refers to the negative impact on economic growth caused by higher tax rates resulting from non-discretionary fiscal policies.

Expansionary gap: An expansionary gap occurs when aggregate demand exceeds potential output, leading to inflationary pressures in the economy. Non-discretionary fiscal policies can be used to address this gap.