Fiscal stimulus

✅ A fiscal stimulus is one in which the government spends more from its own pocket or slashes tax rates.

 ✅ Stimuli put more money in the hands of consumers and spending goes up – thereby encouraging demand & growth.

 ✅Proponents of fiscal stimulus, base their arguments on the Keynesian theory of macro economics.

 ✅ Keynes argued that even small direct interventions by the Government to prop up demand, can have a disproportionately high impact on economic growth due to the multiplier effect.

 ✅ When demand in an economy stays weak for long, businesses stop investing in new projects, unemployment rises, income shrinks and consumer confidence wanes.

 ✅This further hinders spending due to lack of money and thereby dampens demand – creating a vicious cycle.

 ✅If the Government can step in with a fiscal stimulus, it revives business confidence, restarts projects, creates jobs and sets off a virtuous cycle of feel-good, demand and growth.