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Author: Kerryn Fowlie
This paper looks at the use of automatic fiscal stabilisers, particularly in relation to New Zealand's experience over the past business cycle. Allowing the automatic stabilisers to operate in response to cyclical fluctuations in output is likely to yield efficiency gains in a country with a sound fiscal position and a credible approach to medium-term fiscal stability. However, automatic stabilisation does increase the potential for fiscal ill discipline. A risk is that an imprudent Government could allow the automatic stabilisers to operate during a downturn and not bank the gains in the upturn. The discipline imposed by the FRA in New Zealand helps ensure that the Government acts prudently. And a sound underlying fiscal position ensures that when policy action is required, it can be undertaken in a measured manner. Reflecting this, the New Zealand Government has allowed the automatic stabilisers to operate to a greater extent during the most recent recession than during the 1991 recession.