An Analysis of the Functional Effectiveness of the Automatic Stabilisers of Fiscal Policy in China

Huachun Wang

doi:10.11648/j.ijefm.20150305.35

Abstract

Granger causality Wald test and impulse response analysis were employed to test the functional effectiveness of automatic stabilisers of fiscal policy in China, which revealed that the automatic stabilisers exhibited asymmetries in fiscal revenues and expenditures. In particular, automatic fiscal stabilisers reduced economic fluctuations in fiscal revenue during economic booming and recession. With respect to fiscal expenditures, increases and decreases in central fiscal expenditures occurred during times of economic decline and growth, respectively, and thereby exerted countercyclical smoothing effects on the macro-economy; by contrast, increases and decreases in local fiscal expenditures occurred in accordance with economic developments, amplifying economic expansions or recessions. These differences in spending patterns between central and local governments caused malfunctions in automatic stabilisers that were related to fiscal expenditures. Given the premise that the relationship between central and local fiscal approaches should be rationalised, the fiscal spending policies should focus on investments in the livelihood and improvements in the autonomy of budgetary decisions by local governments.

Highlights

Automatic stabilizers are traditionally associated with the taxes, transfers and government spending
The function of automatic stabilizers relies on the assumption that the gross domestic product (GDP) or income fluctuations can be greatly smoothed by the changes in taxes and transfers during the economic cycle
Fiscal revenues decreased, reducing the tax burdens of businesses and individuals; this effect promoted investment and consumption, automatically acting to prevent the economy from sliding further into recession. This pattern of variation in fiscal revenues relative to economic growth suggested that fiscal revenues exhibited procyclical characteristics that are in accordance with the intended function of automatic stabilisers of fiscal policy

Summary

Introduction

Automatic stabilizers are traditionally associated with the taxes, transfers and government spending. Fiscal revenues decreased, reducing the tax burdens of businesses and individuals; this effect promoted investment and consumption, automatically acting to prevent the economy from sliding further into recession This pattern of variation in fiscal revenues relative to economic growth suggested that fiscal revenues exhibited procyclical characteristics that are in accordance with the intended function of automatic stabilisers of fiscal policy. The above analyses determined that in China, changes in economic growth and in fiscal revenue were synchronised This result established that China’s fiscal revenues demonstrated procyclical traits with respect to economic growth and that changes in fiscal revenue occurred in accordance with the expected functions and characteristics of automatic stabilisers of fiscal policy

Causes of Asymmetry

Findings

Conclusions and Policy Implications