What is the Economic Stimulus Package?

Explanation

Most stimulus package measures refer to the targeted monetary or fiscal policy Fiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more measures to upscale the private sector. So, in a way, the package attempts to lift the demand and put the private sector back on the trail, which is a very conservative and orthodox approach.

When the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more hits a recessionRecessionEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. read more, which is the stage where demand drops and the economy might not have the ability to self-correct and stand on its own, the government has to intervene and make things work in a favorable direction. The economy has a high unemployment rateUnemployment RateThe unemployment rate formula calculates the share of people who are not working or are jobless of the total employed or unemployed labour force and is depicted as a percentage. Unemployment Rate = Unemployed People / Labor Force * 100 read more, lower output, and slow growth rates in a recession. The stimulus package might help the economy get back on track with different stabilizing measures.

In terms of fiscal policy, the government attempts to stimulate the economy by giving the citizens’ tax cuts, which eventually leaves them with more disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more to spend. That may increase their purchasing power and increase spending on goods and services. But on the other hand, government expenditure increases, which signifies the injection of liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more in the market.

When the government tries to use monetary policy Monetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more, they might reduce interest rates, which may increase the liquidity in the market, where consumer spending capacity may increase, and investment avenues also open up. Moreover, lower interest rates mean a low cost of borrowing and a reduction in the exchange rateExchange RateThe exchange rate is defined as the rate at which two trading countries exchange marketable items or commodities. It is essentially the cost of exchanging one currency for another. As a result, the exchange rate can be calculated by dividing money in foreign currency by money in domestic currency.read more, boosting export.

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Purpose

  • The stimulus package’s primary approach saves the economy from reaching new lows in unemployment, growth rates, and aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more. The stimulus package, with its measures, tries to drive the economy towards stabilization and recovery.When a recession hits the economy, it might not recover, and some intervention is required at the central level for different economic sectors, which can help raise the curve and minimize the financial damage.As per the Keynesian theory, it is always advisable to live up to private sectorsPrivate SectorsThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more in the economy, leading to more spending in that sector and generating more employment, which will help lift the aggregate demand and lower the unemployment figures. Therefore, the government generally resorts to expansionary fiscal policy, targeting increased business investment spending and full employment.Another important purpose of the economic stimulus package is to target specific economic sectors, where government spending, tax cuts, and low-interest rates are all directed towards the economy’s key sectors to take advantage of the multiplier effect, which may eventually increase private-sector consumption.The government tries to take advantage of this relief package and tries to stabilize its account, so in fiscal stimulus, when it is giving tax cuts, it targets the lower-income belt rather than wealthy individuals as the lower-income belt may spend more from the saved tax income as compared to the affluent individuals so that the government can take advantage of the multiplier effect.

How Does It Work?

  • The government initially tries to identify the suppressed sectors affected by the slowdown or recession, which has a larger impact on the economic output.Post recognizing the sectors, the government designed a stimulus package to help the depressed sectors stabilize their survival in the market.The mediums to reach those sectors are monetary or fiscal policy measures; generally, the government opts for expansionary policy measures targeting both policies’ key rates.This way, the government directly or indirectly tries to pass on the leverage or benefits to the desired sectors, for instance, in terms of low-interest rates on loansLoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more, tax cuts, or relaxation of certain policies to boost growth.

Examples

The classic example is the 2009 U.S. economic stimulus package given by Congress to the U.S. citizens to save the economy from entering the great depressionGreat DepressionThe Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939.read more. The package’s initial phase increased government spending in the selected sectors like infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more, healthcare, education, and renewable energy. Some of the other measures also included tax cuts and unemployment assistance.

The package’s total value accounted for $831 billion spanned ten years, which concentrated more on public spending to get jobs and reduce further economic deterioration. The package also aimed to aid low-income workers, unemployed, and retirees to make them job-ready, including job training.

Impact of Economic Stimulus Package

The impact of these kinds of packages is long-term and can be seen for more than five years. After the package, the economy goes into the healing stage, and the implemented measures slowly start to yield positive results. For example, in 2009, the U.S. implemented a package to reduce unemployment. However, before 2014, the U.S. began to see lower unemployment figures.

Another major impact is that the package stops further damaging the economy. The initial motive would prevent further damage and recovery by infusing funds and liquidity in the required sectors.

This article is a guide to Economic Stimulus Package and its definition. We discussed the government economic stimulus package, examples, and its impact here. Also, you may learn more from the following articles: –

  • Economic RecessionRecessionary GapExpansionary PolicyExpansionary Monetary Policy