What does the word ‘Countercyclical fiscal policy’ imply?

Government’s fiscal policy has big role in stabilizing the economy during business cycles. The two important phases of business cycles are boom and recession. A recession should not be allowed to grow into a deep recession. Similarly, a boom should not explode bigger. It can be said that amplifying the business cycle is dangerous (growing boom and deepening recession).

Practically, the fiscal policy responses using taxation and expenditure can go in two ways in response to the business cycle: Countercyclical and procyclical.

What is countercyclical fiscal policy?

A countercyclical fiscal policy refers to the strategy by the government to counter boom or recession through fiscal measures. It works against the ongoing boom or recession trend, thus, trying to stabilize the economy. Understandably, countercyclical fiscal policy works in two different directions, during these two phases:

Countercyclical fiscal policy during recession

Recession is a business cycle situation where there is slowing demand and falling growth in the economy. Here, the Government’s responsibility is to generate demand by fine-tuning taxation and expenditure policies. Reducing taxes and increasing expenditure will help to create demand and producing upswing in the economy.

Countercyclical fiscal policy during boom

In the case of boom, economic activities will be on upswing. Amplifying the boom is disastrous as it may create inflation and debt crisis, and the government’s responsibility here is to bring down the pace of economic activities. Increasing taxes and reducing public expenditure will make boom mild. Thus, slowing down demand should be the nature of countercyclical fiscal policy during boom.