A nondiscretionary fiscal policy refers to strategies designed to counter oscillations in the economic activity of a country without the explicit intervention of the government, explains class notes from economics professor Dr. F. Steb Hipple for East Tennessee State University. Nondiscretionary fiscal policies are also known as automatic stabilizers.
To ensure they work automatically, nondiscretionary fiscal policies are incorporated into the taxation and spending structure of the government, notes Hipple. The welfare and progressive taxation systems boost demand during economic recessions but dampen demand when the economy overheats. The net effect of a nondiscretionary fiscal policy is to create deficits during recessions and surpluses when the economy expands very quickly.
Unlike nondiscretionary fiscal policies, discretionary fiscal policies require explicit government intervention. Discretionary fiscal strategies are implemented through the government budgetary process. However, these strategies take considerable time to execute, leading to the risk of mismatch. For instance, a tax cut may take effect just as the economy starts expanding. For this reason, discretionary fiscal policies are only used in times of deep recessions such as the period after the 2008 economic crisis. In general, fiscal policies are used by governments to increase or reduce aggregate demand in an economy with the aim of minimizing economic fluctuations, explains Hipple. When an economy expands too quickly, governments raise taxes and reduce spending. In a recession, they reduce taxes and increase spending.