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built-in stabilizers


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Any features of the economy that tend to limit economic fluctuations through routine behaviour, without the need for specific decisions. The government's budget provides an important example. If national income falls, the application of given direct and indirect tax rates cuts revenue automatically; if unemployment rises, the application of given benefit rules ensures that income maintenance payments rise. This raises the budget deficit, and limits the fall in incomes. Similarly, when national income rises the budget deficit falls. The advantage of built-in stabilizers over deliberate policy measures is that they operate automatically and immediately. The disadvantage of built-in stabilizers is that they can only diminish fluctuations and cannot eliminate them completely. Any further stabilization requires deliberate changes in policies.

Subjects: Economics.


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