Working paper

Quantifying the Role Automatic Stabilisers Play in New Zealand Using a Macro-Simulation Approach (WP 24/02)


Automatic stabilisers are fiscal policy’s first line of defence in the face of adverse economic shocks. Automatic stabilisers capture fiscal policy’s automatic countercyclical response to the state of the business cycle, and are determined by factors like the progressivity of the tax system, the size of government and the amount of benefit spending that is dependent on recipients' economic circumstances. Built into the system, they do not require legislative action each time they are implemented, meaning they can be deployed relatively quickly. In this paper I investigate the role automatic stabilisers play in stabilising the New Zealand economy across the business cycle. I benchmark current automatic stabilisation policy against different definitions of neutral fiscal policy to determine their contribution to stabilising the economy. I find the standard deviation of GDP could be up to 29% higher in a world without automatic stabilisers. Plausible gains from strengthening automatic stabilisers from current settings are likely to be much smaller. Automatic stabilisers play a larger role when monetary policy is constrained by the lower bound on interest rates or the monetary policy response to inflation and output is weak.


The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.


I would like to thank Luke Came, Karsten Chipeniuk, Susie McKenzie, Johannes Pfeifer, Marco Ratto, Christie Smith, Bruce White, participants at the 2023 NZAE conference and participants at the 2024 Southern Workshop in Macroeconomics (SWIM) for their useful comments. Any remaining errors are my own.