due to automatic stabilizers when income rises

Source: Maravalle and Rawdanowicz (2020). A ratio of 0 implies no automatic stabilisation effects at all, with disposable income falling by as much as market income. A ratio of 100 implies that automatic stabilisers offset the shock to market income completely, leaving aggregate household disposable income unchanged. Note: The figure shows the degree to which a decline in market income is offset by automatic stabilisers one year after the shock. The analysis accounts for automatic fluctuations in selected tax and expenditure categories including personal income taxes, social security contributions, and unemployment, family, and housing benefits.įigure 1 Share of a market income shock offset by specific automatic stabilisers

The analysis is based on the national account identity of disposable income and builds on the OECD methodology of measuring cyclically adjusted budget balances (Price et al. How effective are automatic stabilisers?Ī new OECD analysis (OECD 2019a, Maravalle and Rawdanowicz 2020) assesses the effectiveness of automatic stabilisers in smoothing household disposable income in 23 OECD countries in the context of a specific negative shock to market income. Further, as no change in legislation is required, automatic stabilisers do not suffer from information, decision, design, and implementation lags contrary to discretionary fiscal measures (Sutherland et al. Automatic fiscal stabilisers have traditionally been seen as superior to discretionary fiscal stimulus and are the most effective tool to stabilise the economy after temporary shocks (Blanchard et al.

For instance, unemployment benefits rise timely as more workers lose their jobs, are temporary as they diminish with falls in unemployment, and target individuals that are most affected by the downturn. Automatic stabilisers refer to automatic changes in government spending and revenues that are timely, temporary, and do not require discretionary decisions by authorities. In contrast, for countries with relatively high debt and budget deficits (including France, Japan, Italy, the UK, and the US) the scope for fiscal easing is limited.ĭecisions about an optimal fiscal reaction to downturns depend primarily on the size and effectiveness of automatic stabilisers as well as available fiscal space. A few European economies with relatively low debt have scope to not only let automatic stabilisers operate fully but to also implement discretionary fiscal policy (Boone and Buti 2019). On the fiscal front, fiscal space differs across countries. Unconventional measures may also provide less stimulus as financial conditions have already been very accommodative for an extended period. The room for conventional monetary policy is limited or exhausted, as central banks in advanced economies have been operating at or near the effective zero lower bound since the Global Crisis. Monetary policy may not be as effective as in the past. This outlook raises the question of how policymakers could effectively accommodate a downturn. Downside risks to the outlook persist, including risks arising from geopolitical tensions, policy uncertainty, and, more recently, from the outbreak of the coronavirus. Growth is expected to be 2.4% in 2020 – the weakest growth rate since the Global Crisis, despite accommodative financial conditions and signs of easing trade tensions (OECD 2020). The economic outlook is gloomy in many countries.

Due to automatic stabilizers when income rises