What does discretionary/non-discretionary spending mean? (1 Viewer)

[jks22]

I'm stuck with a few terms that I would appreciate clarification on:

- Discretionary and non-discretionary spending

- Cyclical and structural components of a budget

- Automatic stabilisers

Thanks!

 

[mmmmmmmmaaaaaaa]

The main difference between 'Discretionary and non-discretionary spending' is that Discretionary Spending refers to non-essential items (You can think of it as the money left over after all expenses are paid. However Non-Discretionary Spending refers to essential items (this would include payments such as rent, mortgage etc)

 

[notme123]

I'm stuck with a few terms that I would appreciate clarification on:

- Discretionary and non-discretionary spending

- Cyclical and structural components of a budget

- Automatic stabilisers

Thanks!

In Fiscal Policy, there are two types of non-discretionary policy and they are automatic stabilizers of income tax and unemployment benefits, which are also known as the cyclical components of the budget. Automatic stabilizers are ongoing long-term policies that are solely influenced by the business cycle. It naturally causes stabilizations in the business cycle through the adjustment in the amount of income tax and unemployment benefit expenditure i.e. they work on their own without govt needing to influence them. For example, during low economic growth, there is a less derived demand for labor and higher cyclical retrenchments, leading to more u/e and greater eligibility for u/e benefit, increasing G, thus AD. Meanwhile, people earn less as a result of u/e, or salaries may fall, meaning overall the country has to pay less income tax as a portion of income (because of the progressive tax system). An decrease in taxation means less leakages and may cause a stronger expansionary/weaker contractionary stance, improving AD during low growth. This is the cyclical component of the budget. The structural or discretionary component refers to everything the govt chooses to tax or spend in the temporary to long term DELIBERATLEY. For E.g. carbon tax is discretionary/structural because it is implemented by the government, job keeper was discretionary/structural because the govt implemented it, infrastructure is discretionary etc. Basically anything that isn't the auto stabilizers is discretionary and structural.

NB: if the govt itself makes changes to the amount u/e benefit allowance or marginal rate of income taxation, that is still discretionary because it was a deliberate change.