JM Keynes recommended compensatory fiscal policy to counter recession. During recession, private expenditure in the form of consumption and investment may decline due to the operation of some adverse factors. This decline in aggregate demand will reduce consumption, investment, employment etc, leading to down turn and recession in the economy. In this juncture, effort by the government through additional expenditure (and reduced taxes) will fill the gap in demand, consumption and investment. The main thrust of compensatory fiscal policy thus is that the government should inject extra expenditure to reinstate demand. In effect, the government expenditure was able to compensate for reduced private expenditure. This fiscal policy is called compensatory fiscal policy. Contra cyclical fiscal policy is to counter business cycles.
