Final answer:
The notion that budgetary slack provides a hedge against adversity is false; it rather represents the practice of creating cushions by misestimating a budget, which can lead to inefficiency. Instead, automatic stabilizers within fiscal policy play the role of mitigating economic fluctuations.
Step-by-step explanation:
The statement is False. Budgetary slack does not serve as a protection against adverse circumstances but is rather an intentional creation of cushions by underestimating revenue or overestimating expenses during budget planning. This can lead to inefficiencies and lack of motivation to improve performance or reduce costs. However, fiscal policy includes automatic stabilizers that do indeed help to mitigate economic fluctuations without the need for active intervention.
These include tax and welfare systems that automatically adjust to changing economic conditions, supporting the economy during recessions and cooling it down during booms. Furthermore, relying on persistent budget deficits can lead to negative macroeconomic outcomes, such as inflation, crowding out private investment, and creating dependency on international investments, which can harm the economy. It's also important to note that automatic stabilizers work best when allowed to operate without the strict constraint of balancing the budget every year, which can exacerbate economic volatility.