Economic Stimulus Package

Article byVivek Shah
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An 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.

Economic Stimulus Package

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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.

Key Takeaways

  • 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 Explained

Economic stimulus package measures refer to the targeted monetary or fiscal policy Fiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more 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 economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more hits a recessionRecessionEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. read more, 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 rateUnemployment RateThe unemployment rate formula calculates the share of people who are not working or are jobless of the total employed or unemployed labour force and is depicted as a percentage. Unemployment Rate = Unemployed People / Labor Force * 100 read more, 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 incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more 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 liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more in the market.

When the government tries to use monetary policy Monetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more, 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 rateExchange RateThe exchange rate is defined as the rate at which two trading countries exchange marketable items or commodities. It is essentially the cost of exchanging one currency for another. As a result, the exchange rate can be calculated by dividing money in foreign currency by money in domestic currency.read more, boosting export.

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Purpose

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.

Examples

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 depressionGreat DepressionThe Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939.read more. The package’s initial phase increased government spending in the selected sectors like infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more, 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.

Impact

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 loansLoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more, 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.

Frequently Asked Questions (FAQs)

1. What were the economic stimulus payments in 2020? 

At the start of March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorized Economic Impact Payments of up to $1,200 per adult and $500 per eligible child under 17 years. These stimulus payments were intended to provide financial assistance to individuals who may have lost their jobs or experienced reduced income due to the pandemic. The Internal Revenue Service (IRS) distributed the payments based on an individual’s income and tax filing status

2. What is Germany’s economic stimulus package? 

The German economic stimulus package of 130 billion euros with 57 various efforts blends two goals: promoting economic recovery and transitioning towards a zero-carbon, sustainable, and digital economy.

3. What are the benefits of an economic stimulus package? 

The benefits of an economic stimulus package include tax cuts or increased government spending to boost economic recovery. Tax cuts can increase disposable income, increasing spending, production, and economic growth. Increased government spending can also create jobs, stimulate consumer spending, and increase business investment.

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