What is Fiscal Stimulus?
By Prasul Surendran, 27th Jun 2011 | Follow this author
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Posted in WikinutBusinessAccounting & Finance
The common term in use after the recession has struck the world. Just a quick guide on what I gather from the word.
Fiscal Policy
Fiscal stimulus is a common term that we have been hearing ever since the recession struck the world. The term simply means the set of steps taken by the government in helping overall economy of the country and helping it boost itself. These are a set of propositions involving borrowing money and spending it. Government does this by increasing the aggregate demand. Attempts involve controlling interests on the debts and increasing subsidies for products. The government also does implement these steps by controlling the rates for money supply, also putting in policies to control taxation and expenditure.
Types of Fiscal Stances
Normally the economies put in three types of stances to make this policies effective.
This include-
a) The neutral stance, in this policy the Government is fully funded by taxes and the overall budget has no impact on the country’s economy.
b) The second stance that the governments usually put up is a expansionary stance, in which the taxes are reduced and spends most of its tax revenue on the overall development of the country.
c)Contractionary stance is the third possible method, which is used very rarely. This involves the Government spending lesser amounts of money than what is allotted to it via taxes.
Sources for Revenue
The Government spends on a lot of services to the country, from police department and defence to the the education allowances and similar. There are few methods by which the funding actually happens for this process:
i) The taxation, the most common and familiar method of revenue for the Government.
ii) Seigniorage, the benefit from printing money.
iii) Borrowing money from the population or abroad
iv) Consumption of Fiscal reserves
v) Sale of fixed assets.
When formulating a fiscal stimulus package, government attempts to control the above said medium to bring in stability to the economy. Another option used in funding of government reserves is by Fiscal Deficit, this is usually funded by issuing treasury bills or bonds of similar nature and gilt-edged securities. Usually these deposits are collected from the population for a fixed-rate of interest for period of time or indefinitely. And incase, the Government finds that the capital and the interests are going beyond the permitted limits then usually the help is requested from abroad funds or similar
Fiscal Surplus is another method used to gain revenue for the Government, here the Government invests in local financial instruments and when the revenue from the taxation and allied media is reduced like in the hours of financial crisis, these reserves could be sold or leased to meet the financial needs.
Implementation of Fiscal Stimulus
With these media of revenue, the government can introduce stimulus packages for the economic development by increasing more cash flow. Which creates more demand in the area and thus increasing the private production and thus reducing unemployment. But with the increase in the funding of markets, this might lead to a inflation which is another issue that needs to be addressed by the Government and brought under control.
Usually economists go against this idea of fiscal stimulus, but this is usually a critical step taken towards development of country and rise successful in amidst of financial crisis.
Hope it helps you understand better
Comments
27th Jun 2011 (#)
Thank you for this explanation, I now understand this financial concept and the effects and cause of its need, well done!
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27th Jun 2011 (#)
thanks a lot for the info
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28th Jun 2011 (#)
Thank you Delicia and Geeta for your wonderful comments :)
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28th Jun 2011 (#)
This is new for me. Thx for sharing.
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28th Jun 2011 (#)
You're very erudite, my friend, when it comes to history and economics. Thanks for the useful article.
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28th Jun 2011 (#)
Thank you Jaya and Buzz for your comments I am blessed with friends like u :)
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28th Jun 2011 (#)
It was interesting reading this and quite useful. Good concepts learnt.
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28th Jun 2011 (#)
Thank you Wonder :)
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28th Jun 2011 (#)
Nice informative article, Prasul. Being a teacher of Business Communications, this has given me some information and things to remember. Thank you and keep up the good work !
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29th Jun 2011 (#)
Excellent work. The article taught me something I always read from the papers and hear from politiicians. Thank you.
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15th Oct 2011 (#)
Accounting and finance has always been serious business and you have given me great thoughts in this article. Thanks a lot for the share and it was really a useful information.
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17th Jan 2012 (#)
Well done. Thanks for your elucidation, Prasul - siva
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