Fiscal policy in action

Here is an interesting chart from the March 2009 interim report of the OECD World Economic Outlook. It calculates the size of the fiscal deficits that OECD countries will accumulate over the 2008-10 period. It decomposes those changes into variations due to automatic stabilizers and those due to discretionary actions (automatic stabilizers are those components of the budget balance that automatically react to the business cycle, such as unemployment benefits).

 

The chart shows that the discretionary actions are the largest in the US (the blue/grey column) measured as % of GDP. However, the overall fiscal stimulus is larger in other countries because of the presence of large automatic stabilizers. The size of the automatic stabilizers is related to the size of the government and the welfare state. 

In the case of Ireland and Iceland, the governments have taken discretionary actions to reduce the size of the deficit, which is the result of a deep recession and the automatic stabilizers (i.e. the government has either increased some taxes or reduced government spending). This "contractionary" fiscal policy is not what their economies need but it is the only way to avoid a loss of confidence.

Antonio Fatás