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.
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.
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. Andincase, 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.
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 :)