What is Fiscal Stimulus?

Prasul Surendran By Prasul Surendran, 27th Jun 2011 | Follow this author | RSS Feed | Short URL http://nut.bz/3rkc0uvz/
Posted in Wikinut>Business>Accounting & 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

Tags

Economies, Fiscal Policy, Government, Recession

Meet the author

author avatar Prasul Surendran
I am an engineer working as systems analyst in one of the leading firms. Writing has been my passion and through various blogs and forums I try to portray my will.

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Comments

author avatar Delicia Powers
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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author avatar Neha Dwivedi
27th Jun 2011 (#)

thanks a lot for the info

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author avatar Prasul Surendran
28th Jun 2011 (#)

Thank you Delicia and Geeta for your wonderful comments :)

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author avatar jayababy
28th Jun 2011 (#)

This is new for me. Thx for sharing.

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author avatar Buzz
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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author avatar Prasul Surendran
28th Jun 2011 (#)

Thank you Jaya and Buzz for your comments I am blessed with friends like u :)

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author avatar wonder
28th Jun 2011 (#)

It was interesting reading this and quite useful. Good concepts learnt.

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author avatar Prasul Surendran
28th Jun 2011 (#)

Thank you Wonder :)

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author avatar Asghar Khan
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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author avatar jak2010
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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author avatar Funom Makama
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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author avatar Sivaramakrishnan A
17th Jan 2012 (#)

Well done. Thanks for your elucidation, Prasul - siva

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author avatar Smile
12th Aug 2013 (#)

It was really useful. Thank you so so much :) wish I could know as much as u do :p

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