The economic recovery programme or the economic stimulus package is designed to boost the economy by spending money. This package of money was released with the intention of stimulating economic activity and employment so that people would get back to work, increase consumer confidence, get more investments and so on. As such, it had the effect of raising employment and consumer confidence in the short term and so on.
In the process, spending went haywire and became an unplanned and unwanted consequence. Inflation rose above the target level, consumer confidence vanished and so did investment due to the high cost of oil and other basic raw materials. Deflationary periods are the normal course of events when economies suffer from economic stimulus package. There are two types of economic stimulus package: a fiscal stimulus package and a direct fiscal stimulus package. The former is used to reduce taxes and increase government spending, while the latter is used to reduce private consumption spending and increase government spending on infrastructure. While both have the same effect, there are some fundamental differences between them.
For starters, the fiscal stimulus package is aimed at increasing economic activity. It is used for education, training and retraining of workers, tax cuts, mortgage refinancing, infrastructure development and so on. It has a long-term impact on the overall economy but only shows results for a short period of time – say, in the next three to five years. On the other hand, the direct economic stimulus package, also known as the employment and economic stimulus package, focuses more on employment and job creation. It is aimed at creating more jobs, reducing unemployment, increasing the availability of jobs and so on.
The employment and economic package go further to address the problem of stagnating economies. In a stagnant economy, there is a high propensity to fall into recession because people spend less money as compared to their income. When a country is in a recession, spending decreases and businesses and consumers begin to shut down. Economic indicators take a nose dive and unemployment rises. This leads to lower gross domestic product (GDP) and higher inflation. If left unchecked, these trends can lead to an increase in social spending, reducing the economic impact of the recession.
So why the fiscal stimulus package? Experts claim that it is the best way of stabilizing the economy and combating the effects of sluggish economic activities. One advantage with this approach over the traditional fiscal stimulus package is that it does not entail interest payments. A lot of money will be injected . . . . . . into the economy by printing currency. However, this will only be beneficial if the economic recovery is faster than the current recession.
Experts also point out that it is easier to raise the public's confidence in government when they see positive signs on the economy such as job growth, rising housing prices and rising consumer confidence. As such, the stimulus package is expected to stimulate economic activity for at least three years, hopefully more. This could easily put consumers under the right frame of mind to spend again. In short, experts believe that the economic recovery programme introduced by the government is working.