How Can Governments Fight Recession with Fiscal Policy?

A recession happens when the economy is doing poorly. This can be seen when there are two straight quarters with a decline in GDP, which is the total money made in a country. Governments can help during a recession by using something called fiscal policy. This just means changing how much money the government spends and how much it collects in taxes. Here are some important ways governments can use fiscal policy to fight a recession.

1. Spending More Money

One of the quickest ways to boost the economy is for the government to spend more money. This spending can go toward things like building roads, healthcare, education, and social services. When the government spends money, it helps create jobs, raises income, and encourages people to spend more.

• Building Projects: For example, if the government invests £150 billion in infrastructure over five years, it could create around 1.5 million jobs and raise GDP by 0.5% each year.
• Multiplier Effect: The multiplier effect means that every dollar the government spends can create even more income for the country. During a recession, a dollar spent could potentially increase GDP by $1.50.

2. Cutting Taxes

When the government lowers taxes, people have more money to spend, and businesses have more money to invest. This can help the economy grow.

• Personal Tax Cuts: Lowering the VAT (a type of tax) from 20% to 15% could mean households spend an extra £45 billion in a year.
• Corporate Tax Cuts: Reducing taxes on businesses can encourage them to spend more on their growth. For instance, cutting the tax rate from 19% to 15% could lead to a 5% increase in business investments.

3. Direct Financial Help

During tough times, many people and businesses struggle with money. Governments can offer direct financial help to ease their challenges and keep people spending.

• Unemployment Benefits: Expanding unemployment benefits can help those who are out of work. For example, when unemployment in the UK rose during the COVID-19 pandemic, the government introduced the Job Support Scheme, spending £4 billion.
• Business Loans and Grants: Offering grants or interest-free loans to small businesses can help them avoid shutting down. The UK’s Bounce Back Loan scheme provided £47 billion to support over 1.5 million businesses during the pandemic.

4. Hiring More Public Workers

Increasing public sector jobs during a recession can help stabilize the job market. Governments should focus on hiring in areas like healthcare and education, which can help boost overall demand.

• Healthcare Jobs: Hiring more staff for the NHS could create about 50,000 jobs, helping to support the economy as it recovers.

5. Working with Monetary Policy

For fiscal policy to be most effective, it should work hand-in-hand with monetary policy. Lowering interest rates can help government spending initiatives, making it cheaper for people and businesses to borrow money.

• Lower Interest Rates: After the 2008 recession, the Bank of England lowered interest rates to 0.5%, and later to 0.1% in 2020, encouraging more investment and spending.

Conclusion

Using smart fiscal policy during a recession means increasing government spending, cutting taxes wisely, providing direct help to people and businesses, and hiring more public workers. With these strategies, governments can increase demand, support economic recovery, and help reduce the negative effects of a recession. By carefully monitoring the outcomes of these actions and making adjustments, governments can better tackle economic challenges.