Principles of Macroeconomics / Unit 14 MAC 1322 worked example, 60 to 90 seconds
Automatic or Discretionary
The idea
Classify a budget change as automatic or discretionary, then say which way it pushed. The test is whether anyone had to decide. If the change followed from existing law as conditions changed, it is automatic; if a new measure was passed, it is discretionary.
In practice
Unemployment rises and benefit payments rise with it under rules already in force: automatic, and pushing against the downturn. A legislature passes a new temporary tax rebate: discretionary, and expansionary. Corporate tax receipts fall because profits fell: automatic, and again cushioning. A legislature raises the benefit payment per claimant: discretionary, even though it acts on an automatic programme, because someone decided. A boom raises income tax receipts as earnings rise: automatic, and leaning against the boom.
Where people slip
The fourth case is where classification gets interesting: a discretionary change to the rules of an automatic programme is discretionary. And note what the stabilisers do to the aggregate demand curve, which is nothing. Because they operate automatically, their effect is already built into the curve rather than shifting it.
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