Economic Downturns: Considerations for an Effective Automatic Fiscal Response

Fast Facts

"Automatic stabilizers" adjust federal spending and taxes when there is an economic downturn. These adjustments can help keep the economy afloat and mitigate harmful effects. An example of an automatic stabilizer is when unemployment is high and incomes fall, and more people become eligible for a government benefit like Medicaid.

Automatic stabilizers are more effective when they're timely, temporary, targeted, and predictable. We used these principles to help identify 17 policy options that could strengthen automatic stabilizers, along with tradeoffs to consider, such as effects on the budget and improper payments.

Medicaid is a type of automatic stabilizer

Highlights

What GAO Found

The federal budget contains mechanisms—known as automatic stabilizers—that alter spending levels and tax liabilities in response to changes in economic conditions without direct intervention by policymakers. For example, when incomes and the employment level fall, more people may become eligible for certain government benefits, such as unemployment insurance and food assistance, and tax liabilities may be lower. Conversely, when incomes and the employment level rise, eligibility for government benefits may fall and tax liabilities may rise.

GAO identified four principles that could be used to assess the design or reform of automatic stabilizers. Information from literature and economic and social policy experts suggests that effective automatic stabilizers are timely, temporary, targeted, and predictable. Within those four broad principles, GAO identified eight factors that contribute to the effective design of automatic stabilizers (see table).

Principles and Factors for Effective Design of Automatic Stabilizers

Principles

Automatic stabilizers are more effective when they:

Timely

Provide stimulus when it is needed most

Temporary

End stimulus as the economy recovers

Are designed to minimize their long-term effect on the deficit

Phase out benefits gradually as the economy recovers

Targeted

Are intended to have the greatest economic impact

Reach the entire eligible population to the extent possible

Tailor aid to state and local governments to reflect the relative severity of the economic downturn in each state or locality

Predictable

Are established in advance so that they are ready in times of crisis

Source: GAO analysis of information from literature and interviews with experts. | GAO-25-106455

Deficit increases caused by increased spending and lower tax revenue during economic downturns should be temporary and should be mitigated by automatic declines in spending and increases in tax revenue during periods of economic growth. Developing internal controls and improving fraud risk management in automatic stabilizer programs before an economic downturn takes place can help agencies reduce improper payments and help mitigate their effect on the deficit.

While some automatic stabilizers naturally adjust to economic conditions, others use a pre-determined set of rules, known as a trigger, to automatically initiate or expand economic stimulus at the beginning of an economic downturn and end or reduce stimulus when economic conditions no longer call for it. When economic indicators, such as the unemployment rate, reach an established threshold, triggers could start or end stimulus accordingly. Well-designed triggers have the potential to match stimulus to real-time economic conditions and avoid the delays that may occur when policymakers rely on taking discretionary action. However, designing triggers may be challenging, in part because it is difficult to accurately assess economic conditions in real time. Discretionary fiscal policy can allow policymakers more flexibility to tailor assistance to specific circumstances, but actions need to be timely to have the maximum effect.

Based on an analysis of the strengths and limitations of policy options from relevant literature and interviews with knowledgeable experts, GAO identified 17 potential policy options to enhance existing automatic stabilizers or to create new ones (see table). These options are not listed in any specific order and are not comprehensive of all potential policy options for enhancing automatic stabilizers. GAO previously recommended that Congress consider taking action that would enhance Medicaid as an automatic stabilizer. Other than that previous recommendation, GAO does not endorse any specific policy option.

Policy Area

Policy Option

Unemployment Insurance (UI)

1. Temporarily expand UI eligibility

2. Temporarily increase weekly UI benefit amounts

3. Temporarily increase the duration of UI benefits

Short-Time Work Programs

4. Temporarily federally fund the Short-Time Compensation program^a

5. Expand short-time work programs to all states

Supplemental Nutrition Assistance Program (SNAP)

6. Temporarily increase SNAP benefit amounts

7. Temporarily suspend SNAP time limit and work requirements for able-bodied adults without dependents

8. Temporarily waive certain SNAP administrative requirements

9. Temporarily increase federal SNAP administrative funding to states

Medicaid

10. Adjust the Federal Medical Assistance Percentage formula to be responsive to economic conditions

Tax system

11. Provide direct payments to individuals and families through the tax system

12. Temporarily reduce employee payroll taxes

Earned Income Tax Credit (EITC)

13. Temporarily allow taxpayers the option to include or exclude UI compensation when calculating EITC

14. Temporarily increase EITC amounts for eligible taxpayers without qualifying children

15. Temporarily allow taxpayers the option to use income from a prior year to calculate EITC amounts

16. Temporarily increase the EITC phase-in rate

Child Tax Credit

17. Temporarily provide an advance Child Tax Credit

Source: GAO analysis of information from literature and interviews with experts. | GAO-25-106455

^aThe Short-Time Compensation program is a part of the UI system and allows employees experiencing a reduction in work hours to collect a percentage of unemployment benefits to replace a portion of their lost wages.

Each of these policy options have trade-offs with other policy goals. Some general trade-offs that are broadly applicable to many of the options include:

Improper payments. Increasing benefit amounts or expanding eligibility without appropriate administrative capacity could increase the risk of improper payments—payments that should not have been made or were made in incorrect amounts. Improper payments can include payments to ineligible recipients, duplicative payments, or payments for ineligible goods and services. Developing internal controls before a crisis occurs could help prevent or mitigate improper payments and potential fraud.

Why GAO Did This Study

GAO previously found that automatic stabilizers reduced the detrimental effects of recent economic downturns. For example, studies GAO reviewed showed that during downturns automatic stabilizers generated additional economic activity. They also had positive effects on the well-being of individuals and families, such as alleviating poverty and supporting positive health outcomes. Automatic stabilizers temporarily increase federal deficits in the wake of economic downturns.

GAO was asked to review several issues related to automatic stabilizers. This report describes (1) factors that contribute to the effective design of automatic stabilizers, (2) how triggers can be used to support automatic stabilization, and (3) the trade-offs and other considerations of select policy options to enhance automatic stabilizers.

To identify the factors that contribute to the effective design of automatic stabilizers and how triggers can be used to support automatic stabilization, GAO evaluated and compiled information from a literature review and from 21 expert interviews.

To identify policy options, GAO assessed information from a literature review and interviewed 21 experts in economic policy, social policy, automatic stabilizers, and specific policy areas. GAO evaluated evidence of various potential automatic stabilizers' strengths and limitations, including their alignment with the factors that make automatic stabilizers effective. GAO discussed the potential automatic stabilizers with applicable federal agencies.

Recommendations

GAO previously recommended that Congress could consider enacting a Federal Medical Assistance Percentage formula that targets variable state Medicaid needs and provides automatic, timely, and temporary assistance in response to national economic downturns.

The Departments of Agriculture, Health and Human Services, Labor, and the Treasury provided technical comments, which we incorporated as appropriate.

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Recommendations

GAO previously recommended that Congress could consider enacting a Federal Medical Assistance Percentage formula that targets variable state Medicaid needs and provides automatic, timely, and temporary assistance in response to national economic downturns.

The Departments of Agriculture, Health and Human Services, Labor, and the Treasury provided technical comments, which we incorporated as appropriate.