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Fiscal Stimulus should Continue in 2010

World Bank chief declared that Governments should continue the fiscal stimulus in to 2010. It is necessary to maintain the fiscal stimulus to combat recession.

To analyze how the maintaining of fiscal stimulus would be effective in combating recession, it is necessary to understand the intricacies of economics.

What exactly is a Fiscal Policy? A fiscal policy is a measure adopted by the government to spend on various means and also collect revenue, to influence the economy. The two major components of the Fiscal policy are thus spending and taxation.

Fiscal policy directly impacts:

Aggregate demand
Economic activity
Outline of resource allocation
Income distribution

It is the fiscal policy which finally decides the relative effect of any budget to the economic activity. Depending upon these factors, there are three different, possible outcome of the economic activity.

Neutral Fiscal policy

The fiscal policy is neutral because here the government spending is equal to the amount of taxes collected. That means there is no activity at all, and the economy is maintaining a neutral position. The budget here is totally balanced out.

Expansionary Fiscal policy

As the name itself is suggestive, here the government spending has expanded or has registered an increase, where as the taxes collected are lesser, and is associated with a deficit budget.

Contractionary Fiscal policy

This indicates that the government has reduced its spending or there is increased collection of taxes, or may be both together. This naturally causes an increase in the budget surplus or reduction of the budget deficit, if the previous budget was a deficit one. This is associated with a surplus budget.

The highly important point to be noted here is the insinuation that Fiscal policy can be effectively and ingeniously used as a resource to tackle the big word-RECESSION.

This was first suggested by John Keynes in 1930 during those times of Great Depression.

This is again relevant in modern times, especially the current times where there is Global recession and economies nose diving.

Fiscal stimulus can be defined or understood as measures undertaken by the government to reduce taxes or increase of government spending with a view to increasing aggregate demand and thereby increasing economic activity.

Fiscal stimulus in the year 2009 has been charted out at 2 percent of the world GDP by most of the major countries. This amount is considered to be adequate by the economists, but what is more important seems to be the continuation of the fiscal stimulus. The mantra everywhere is 2010-Fiscal stimulus should continue.

President Obama has proposed about $ 850 billion as the fiscal stimulus, majority of which is proposed to be spent on infrastructure and science, and also for huge government projects like the green projects, which includes the alternative and non-polluting or lesser polluting sources of energy like solar, wind, clean coal and nuclear energy. Also provisions have been done for social welfare payments for the jobless and the poor, children, education, training, small businesses etc. The total amount of interest expected to be paid out for this borrowing is somewhere around $375billion.

Tags: bank, Economics, government, Income, policy, revenue, Stimulus, tax, Taxation

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