What is Temporary and Permanent Fiscal Policy?

A temporary tax cut or spending increase will explicitly last only for a year or two, and then revert to its original level. A permanent tax cut or spending increase is expected to stay in place for the foreseeable future. The effect of temporary and permanent fiscal policies on aggregate demand can be very different. Consider how you would react if the government announced a tax cut that would last one year and then be repealed, in comparison with how you would react if the government announced a permanent tax cut. Most people and firms will react more strongly to a permanent policy change than a temporary one.

This fact creates an unavoidable difficulty for countercyclical fiscal policy. The appropriate policy may be to have an expansionary fiscal policy with large budget deficits during a recession, and then a contractionary fiscal policy with budget surpluses when the economy is growing well. However, if both policies are explicitly temporary ones, they will have a less powerful effect than a permanent policy.

Related Topics

• What is Government Spending?
• Autonomous Spending
• Autonomous Consumption
• Fiscal Policy
• Expansionary Fiscal Policy
• Contractionary Fiscal Policy
• Progressive vs Regressive Tax
• Marginal Tax Rates
• Proportional Tax
• Trickle Down Theory
• Discretionary Fiscal Policy
• Automatic Stabilizers
• Effects of Discretionary Policy (Interest Rates & Lags)
• Crowding Out Effect 
• National Debt
• Government Borrowing
• Golden Rule
• Ricardian Equivalence
• Balanced Budget - Deficit and Surplus
• National Debt
• Standardized Employment Budget
• Deficit Hawk
• Austerity
• Twin Deficits
• Fiscal Policy and the Aggregate Supply and Demand Curve
• Stabilization Policy
• Robin Hood Effect
• Ricardo Barro Effect
• Automatic Stabilizers
• Standardized Employment Budget
• How Does Fiscal Policy Affect Interest Rates? 
• Crowding Out
• Types of Lag in Fiscal Policy
• Temporary and Permanent Fiscal Policy
• Limitations of Fiscal Policy?
• How Politics Affects Discretionary Fiscal Policy
• Government Borrowing
• National Savings and Investment Identity
• Debtor Nation
• Fiscal Policy Affects Trade Balances
• Twin Deficits
• Exchange Rates Affect Budget and Trade Deficits
• What are the risks of chronic large deficits in the United States?
• How Fiscal Policy Can Affect Trade Imbalances
• Government Borrowing Affect Private Savings
• Ricardian Equivalence
• Fiscal Policy Affects Investment and Economic Growth
• Crowding Out of Physical Capital Investment?
• How Does Government Borrowing Affect Interest Rates in Financial Markets?
• Government Investment in Physical Capital
• Public Investment in Human Capital
• Fiscal Policy Can Affect Technology Development

• Economic Cycle or Business Cycle
• Business Cycle Indicator
• Peak and Trough
• Recession and Depression
• Hard Landing vs Soft Landing
• Economic Bubble
• Boom and Bust Cycle
• Great Depression
• Baby Boomer Age Wave Theory

• Skyscrapper Effect (Economics)
• V-Shaped Recovery
• W-Shaped Recovery
• U-Shaped Recovery
• Kondratieff Wave Cycle
• Contagion
• Feedback Rule Policy
• American Customer Satisfaction Index
• CNN Effect
• Bureau of Economic Analysis
• Business Starts Index
• American Recover and Reinvestment Act
• Abenomics
• Emergency Economic Stabilization Act of 2008
• Commodity Credit Corporation
• Humphrey Hawkins Act

• Real Economic Growth Rate
• Fox-Trot Economy

• Stagnation
• Neoclassical Growth Theory
• Exogenous Growth Theory
• Endogenous Growth Theory
• New Growth Theory - Explained
• Classical Growth Theory - Explained
• Real Economic Growth Rate - Explained
• Plutonomy