Automatic stabilizers are policies or mechanisms built into the economy that work to offset fluctuations in economic activity. During a recession, automatic stabilizers impact tax revenue and government spending in the following ways:
1. Tax revenue will decrease: In a recession, individuals and businesses tend to earn less income, leading to lower tax revenues collected by the government. This is because income and profits are reduced, resulting in lower tax liabilities. For example, income taxes and corporate taxes may decrease due to lower earnings during a recession.
2. Government spending will increase: Automatic stabilizers like unemployment benefits and welfare programs typically expand during a recession as more people become unemployed or experience financial hardship. This increase in government spending is aimed at providing assistance to those in need and stimulating the economy by boosting consumer spending.
In summary, during a recession, automatic stabilizers lead to a decrease in tax revenue due to lower incomes and profits, while government spending increases to support individuals and stimulate economic activity.
