![]() ![]() In periods of positive economic growth – we see low levels of annual government borrowing. Also, sales tax revenues will fall as people spend less. Tax receipts fall – due to people earning lower incomes. Also, with higher growth, there will be a rise in income tax receipts and corporation tax receipts – this helps to limit the growth rate. In periods of high economic growth – government spending on unemployment benefits will fall – causing an improvement in government finances. In a recession – ceteris paribus government borrowing will increase.Įxample of Automatic Stabilisers in US economy.This increase in benefit spending and lower tax collection helps to limit the fall in aggregate demand. With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. However, automatic stabilisers will help to limit the fall in growth. In a recession, economic growth becomes negative. In a period of high growth – ceteris paribus government borrowing will fall. ![]() With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment benefits. With higher growth, the government will receive more tax revenues – people earn more and so pay more income tax (note the tax rate doesn’t change, the amount received just becomes higher).
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