Economic Stimulus Package

An economic stimulus package is an attempt by the Central Government of any nation to stabilize the economy through monetary and fiscal policy expansion. It attempts to avert the economic slowdown and get the economy out of recession by encouraging private sectors to get back on their feet, eventually leading to economic growth.

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.

• An economic stimulus package is a set of monetary and fiscal policies a country's central government implements to stabilize the economy and promote growth.
• The main goal of an economic stimulus package is to prevent an economic slowdown and recession by encouraging private-sector activity, which leads to economic growth.
• The primary focus of a stimulus package is to prevent high unemployment levels and create job opportunities.
• The 2009 U.S. economic stimulus package, implemented by Congress to prevent the economy from entering another Great Depression, is an example of an economic stimulus package.

Economic stimulus package measures refer to the targeted monetary or fiscal policy 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 economy hits a recession, 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 rate, 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 income 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 liquidity in the market.

When the government tries to use monetary policy, 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 rate, boosting export.

In dire situations for the economy and the people within the economy, these packages not only provide immediate relief but also help the economy crawl back towards normalcy. One such situation was during the pandemic, almost all countries received COVID economic stimulus packages. Let us understand their purpose in detail through the discussion below.

• The stimulus package's primary approach saves the economy from reaching new lows in unemployment, growth rates, and aggregate demand. 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 sectors 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.

It is important to understand the practical applications to completely understand a concept. Hence, let us understand the concept in detail with the help of a couple of examples.

Example #1

John works as a mason at a construction company in New Jersey. During the COVID-19 pandemic, only essential services could function and thereby, affecting John and his livelihood.

Without many options, he decided to work as a delivery agent for milk and other essentials. However, the income from construction and from his temporary fix led to a steep decline, making it difficult to make ends meet.

It came as a relief when the United Nations (UN) declared a COVID economic stimulus package. With the help of this package, he was not only able to make use of the cash for immediate relief such as pain medication and essentials for his family but also could sustain his livelihood until things walked back towards normalcy.

Example #2

In 2009 U.S. economic stimulus package given by Congress to the U.S. citizens to save the economy from entering the great depression. The package's initial phase increased government spending in the selected sectors like infrastructure, 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, the unemployed, and retirees to make them job-ready, including job training.

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.

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 loans, tax cuts, or relaxation of certain policies to boost growth.

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 into the required sectors. It is also important to keep in mind that different countries would approach the situation differently. For an advanced economy, pumping in economic aid towards international trade or subsidies for their local businesses might be apt but for a developing economy, the top priority might be to ensure its citizens’ survival.

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

• Economic Recession
• Recessionary Gap
• Expansionary Policy
• Expansionary Monetary Policy