What Is Fiscal Stimulus?

Fiscal Stimulus

First Published Date : November 10, 2010 AdawnJournal.com

Right now there is a lot of talk about how the government is trying to get the economy moving through the use of stimulus packages. Often, many wonder about just how effective a stimulus package is and whether or not fiscal stimulus is actually something that should be used. The problem is that many people do not understand what fiscal stimulus is, so to help, here is a rundown to get you up to speed.

Fiscal policy is essentially fiscal stimulus and it involves the use of government spending and revenue collection to help influence the economy, usually to restart it and get it moving again during a recession. Government expenditures, known as fiscal stimulus, helps to distribute income, allocate resources, and aggregate the demand and level of economic activity.

Many economists actually doubt just how effective a fiscal stimulus actually is though. The reason is that some economists feel that fiscal stimulus will cause crowding out. What this means is that government borrowing will lead to higher interest rates, which then will offset the stimulus and its impact on spending. When the government is running into a deficit with its budget, then the government gets its money from issuing government bonds, which is a form of borrowing from the public. The government can also borrow from overseas or monetize the debt. When the government funds a deficit with government bonds, the borrowing itself creates a higher demand for credit, which then causes interest rates to increase. This in turn creates a lower demand for goods and services, which completely goes against the point of the stimulus package itself.

In the United States, the most famous example of fiscal stimulus is the American Recovery and Reinvestment Act of 2009. The point of this stimulus was to create jobs and promote consumer investing and spending through the recession. This goes along with the basis of a fiscal stimulus, which is the government running a deficit in order to improve spending with the consumers through a recession. Many economists felt this was the wrong path to take but the Federal Reserve had already cut interest rates to zero, which thereby reduced the number of policy options open to the government. The flow of cash within the government was also stagnant, which made things difficult and the government argued that a stimulus was the only option within these conditions. This fiscal stimulus package was worth $787 billion and included the expansion of unemployment benefits, social welfare services, increased spending in education, the energy sector, infrastructure and health care. It also featured tax incentives for consumers and companies to help jump-start the economy.

It will be awhile before we know for sure if the stimulus package worked or not, but as for now, the concept of fiscal stimulus appears to be the best bet for many industrialized countries around the world who are trying to improve their economies and get out of the worst recession since the Great Depression. Now you know what a fiscal stimulus is, which will help you understand how it works and how it affects you better.