## Growth Dividend from Stabilizing Fiscal Policies

_IMF Blog, April 8, 2015_

## Source details

**Canonical URL:** [Growth Dividend from Stabilizing Fiscal Policies](https://www.imf.org/en/blogs/articles/2015/04/08/growth-dividend-from-stabilizing-fiscal-policies)

## Other formats

- [Markdown version](/en/blogs/articles/2015/04/08/growth-dividend-from-stabilizing-fiscal-policies/index.md)
- [Structured JSON version](/en/blogs/articles/2015/04/08/growth-dividend-from-stabilizing-fiscal-policies/index.json)
- [Bundle manifest](/en/blogs/articles/2015/04/08/growth-dividend-from-stabilizing-fiscal-policies/bundle-manifest.json)

## Bibliographic details
- Authors: Xavier Debrun
- Published: April 8, 2015

---

### Key findings on fiscal stabilization and growth
- Study covers experience with fiscal stabilization during the past three decades in a broad sample of 85 advanced, emerging market, and developing economies.
- Governments can use fiscal policy to smooth fluctuations in economic activity, and this can lead to higher medium-term growth.
- In advanced economies, making fiscal policies more stabilizing could cut output volatility by about 15 percent, with a growth dividend of about 0.3 percentage point annually.
- Fiscal stabilization coefficients measure the impact of a one percentage-point change in output on the budget balance (in percent of GDP); a coefficient equal to 1 means the fiscal response is exactly of the same size as the initial shock.
- Fiscal stabilization coefficients can be quite sizable, especially in advanced economies; in emerging markets and developing economies stabilization is generally more modest and less frequent, though some have large coefficients.
- Cross-country correlations between volatility and stabilization coefficients are clearly negative, indicating overall reduction in output volatility due to fiscal stabilization.
- A more stable macroeconomic environment created by fiscal stabilization has positive effects on medium-term growth, plausibly because less uncertainty encourages investment in physical, human, and social capital.

### How fiscal policy stabilizes output
- Fiscal policy stabilizes the economy when the budget balance increases when output rises and decreases when output falls.
- During a contraction:
  - Tax revenues fall with income (or tax rates can be deliberately cut), and unemployment benefits increase with the number of unemployed, helping maintain income and purchasing power.
  - Policymakers can also raise demand directly by deliberately spending more, with a higher deficit (or lower surplus) cushioning the blow on output.
- The response of the government budget balance to economic activity is the key to understanding fiscal contribution to output stability.

### Role and limits of automatic stabilizers
- Automatic stabilizers—tax payments that move with income and social transfers such as unemployment benefits—operate in real time without decision or implementation lags, making them a very effective way to make fiscal policy stabilizing.
- Fiscal actions often undermine automatic stabilizers, most notably the tendency to spend revenue windfalls during good times.
- Simulations (described in the source) show:
  - “Symmetric stabilization” with deficit reductions in good times fully offsetting deficit increases in bad times can produce a stable public debt path.
  - Spending just half of revenue increases during booms while letting deficits fully absorb downturns can send debt on an upward path.

### Policy implications and recommendations
- Avoid measures that destabilize output, such as spending increases in good times; stability, growth, and debt sustainability could all greatly benefit from such restraint.
- A well-designed fiscal framework can encourage policies that preserve stabilization properties of the budget.
- Countries could augment automatic stabilizers, but this should not be done through undue increases in taxes and transfer programs because these can have undesirable side effects on growth and employment.
- The Fiscal Monitor discusses options to boost stabilizers while avoiding these caveats; one practical starting point is preventing certain tax deductions from increasing during booms and decreasing during recessions.

*Source: Growth Dividend from Stabilizing Fiscal Policies, Xavier Debrun, April 8, 2015*

---

## Content in this bundle

- **稳定性财政政策的增长红利; iMFDirect博客; 2015年4月8日**
  - [稳定性财政政策的增长红利; iMFDirect博客; 2015年4月8日 (Markdown version)](/external/chinese/np/blog/2015/041015c.pdf.md){rel="alternate" type="text/markdown"}
  - [稳定性财政政策的增长红利; iMFDirect博客; 2015年4月8日 (PDF)](/external/chinese/np/blog/2015/041015c.pdf){rel="external" type="application/pdf"}
- **安定化機能が優れた財政政策から得られる成長の配当: ザビエル・デブラン iMFdirect ブログ, 2015年4月8日掲載**
  - [安定化機能が優れた財政政策から得られる成長の配当: ザビエル・デブラン iMFdirect ブログ, 2015年4月8日掲載 (Markdown version)](/external/japanese/np/blog/2015/040815j.pdf.md){rel="alternate" type="text/markdown"}
  - [安定化機能が優れた財政政策から得られる成長の配当: ザビエル・デブラン iMFdirect ブログ, 2015年4月8日掲載 (PDF)](/external/japanese/np/blog/2015/040815j.pdf){rel="external" type="application/pdf"}
- **Chapter 2. Can Fiscal Policy Stabilize Output?, Fiscal Monitor, April 2015**
  - [Chapter 2. Can Fiscal Policy Stabilize Output?, Fiscal Monitor, April 2015 (Markdown version)](/external/pubs/ft/fm/2015/01/pdf/fmc2.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 2. Can Fiscal Policy Stabilize Output?, Fiscal Monitor, April 2015 (PDF)](/external/pubs/ft/fm/2015/01/pdf/fmc2.pdf){rel="external" type="application/pdf"}
- **Дивиденды роста от стабилизирующей налогово-бюджетной политики; Ксавьер Дебрун; 8 апреля 2015 года**
  - [Дивиденды роста от стабилизирующей налогово-бюджетной политики; Ксавьер Дебрун; 8 апреля 2015 года (Markdown version)](/external/russian/np/blog/2015/040815r.pdf.md){rel="alternate" type="text/markdown"}
  - [Дивиденды роста от стабилизирующей налогово-бюджетной политики; Ксавьер Дебрун; 8 апреля 2015 года (PDF)](/external/russian/np/blog/2015/040815r.pdf){rel="external" type="application/pdf"}

---

## References

- [عربي](http://blog-montada.imf.org/?p=3608)
- [https://www.imf.org/wp-content/uploads/2015/04/fm-apr2015-blog-chart-1.jpg](https://www.imf.org/wp-content/uploads/2015/04/fm-apr2015-blog-chart-1.jpg)
- [https://www.imf.org/wp-content/uploads/2015/04/fm-apr2015-blog-chart-2.jpg](https://www.imf.org/wp-content/uploads/2015/04/fm-apr2015-blog-chart-2.jpg)
- [https://www.imf.org/wp-content/uploads/2015/04/fm-apr2015-blog-chart-3.jpg](https://www.imf.org/wp-content/uploads/2015/04/fm-apr2015-blog-chart-3.jpg)
- [Dams and Dikes for Public Finances](http://blogs.imf.org/2015/03/18/dams-and-dikes-for-public-finances/)

_Source: https://www.imf.org/en/blogs/articles/2015/04/08/growth-dividend-from-stabilizing-fiscal-policies_