Government Stimulus Package
It is a collection of tax credits and incentives used by the governments of different countries on an ongoing basis to stimulate their economies and prevent them from falling into a financial crisis.
What is a Government Stimulus Package?
A stimulus package is a collection of tax credits and incentives used by the governments of different countries on an ongoing basis to stimulate their economies and prevent them from falling into a financial crisis.
The purpose of a stimulus package is to provide tax rebates and boost spending, which in turn creates an increase in demand, employment, income, and so on. There will be a continuation of this cycle until the economy recovers.
A stimulus package was used by the United States during the global recession, in 2008, as an attempt to increase job creation and accelerate the recovery of the US economy.
A second example is India, which used its first stimulus package in 2008 to ensure the stability of bank deposits and the financial system.
Infusing liquidity into the banking industry ensured that the financial system remained stable.
To inject liquidity into the banking system, the Reserve bank of India cut the cash reserve ratio (CRR), repo rate, and reverse repo interest rates. In addition, the bank also addressed the problems faced by non-banking financing companies.
The Repo ('repurchasing option' or 'repurchase agreement') rate is the rate at which a country's central bank lends money to commercial banks in the event of a shortfall of funds. Monetary authorities use repo rates to control inflation.
With the help of a stimulus package, an economy that is emerging from a recession can be strengthened. Lowering tax rates and increasing government spending can help lower unemployment and boost consumer spending.
Government Stimulus Package Explained
Stimulus packages include incentives and tax rebates during times of economic recession that are less severe or destructive, such as those offered during the recent COVID-19 pandemic.
An administration may offer this to stimulate the economy in an attempt to bring the country out of a recession or prevent it from slowing down.
The stimulus package can be either in the form of:
1. Monetary Stimulus Package
As a means of stimulating the economy, monetary stimuli include cutting interest rates. As a result, there is a greater incentive for people to borrow when interest rates are missed because borrowing costs are lowered.
It has been shown that increased borrowing by individuals and companies leads to more money in circulation, a reduction in the incentive to save, and a rise in spending.
Additionally, lowering interest rates may weaken a country's exchange rate, increasing exports for that country.
Increasing exports can stimulate the economy and boost spending by providing more income to the economic system.
2. Fiscal Stimulus Package
By fiscal stimulus, a regime multiplies its purchasing power by reducing taxes or increasing spending. If taxes are lowered, people have more money at their disposal.
Increasing disposable income means people have more money to spend, which increases demand, production, and economic growth.
When an administration injects money into the economy, it reduces unemployment, increases spending, and ultimately counteracts the negative effects of a recession.
3. Quantitative Easing Package
The objective of quantitative easing is to increase the level of inflation by reducing interest rates.
The process of quantitative easing refers to the act of a central bank purchasing large amounts of financial assets, such as bonds, from commercial banks and other financial institutions.
By purchasing these assets in large quantities, financial institutions:
- Increase their excess reserves
- Make lending easier
- Increase the money supply
- Increase bond prices
- Reduce yields
- Lower interest rates
When a government does not feel a conventional monetary stimulus is enough to stimulate the economy, it will usually resort to a quantitative easing program.
Government Stimulus Package Objectives
Stimulus packages are often used when the economic climate is at risk of heading into a recession or if a recession has already begun.
Keynesian economic policy is an example of stimulus packages. There is an ongoing economic and political debate regarding the effectiveness of these policies.
A stimulus package is a set of economic measures that a regime introduces to stimulate stagnant economic conditions.
In most cases, it aims to stimulate the economy and prevent or reverse a recession by increasing employment and consumer spending.
An argument for the usefulness of a stimulus package finds its roots in Keynesian economics, which states that recessions do not self-correct. The role of regime intervention in reducing recessionary effects is therefore justifiable.
For a stimulus to have the desired effect, the administration must increase spending. This rise in expenditure will offset any decrease in private spending, thereby boosting aggregate demand and closing the output gap.
Stimulus packages are a coordinated effort to lift the economy out of a depression or recession through increased expenditure, lower taxes, and interest rates.
In 2020 and 2021, numerous stimulus packages were approved by the U.S. Senate to help alleviate the effects of COVID-19.
Government Intervention
It is very probable that in a situation where an economy is experiencing or is about to enter a recession, the regime will intervene by enacting a series of economic measures to dampen its impact.
Economists and political leaders of a country can introduce legislation such as government stimulus bills to kickstart the economy.
It is important to note that compared to an economic stimulus package that takes the form of coordinated monetary policy and fiscal policy, a government stimulus package only consists of fiscal policy action by the government.
Fiscal Policy
A fiscal policy is a means by which an administration uses its spending and taxation policies to influence overall economic conditions. In contrast to monetary policy, fiscal policy is not associated with a country's central bank.
In certain economic situations, a government may enact these measures to prevent the economy from entering a recession where growth is slow or negative.
In addition, the administration may choose to implement reverse measures if an economy is growing too rapidly and inflation is out of control.
If economic activities decline over a long period, an economy is said to be in a recession. It is usually accompanied by a decrease in the level of Gross Domestic Product (GDP).
To bounce back from a recession, a nation's central bank and government must coordinate efforts to increase the country's GDP. By influencing the individual components of a country's GDP, a government stimulus package aims to increase that country's economic outlook.
Government spending
Thoughtful planning and consultation enable an administration to direct "its spending" component of GDP on public projects. Moreover, these projects can lead to job creation and economic growth.
Governments can also choose to increase their investment in certain projects or sectors, i.e., public transportation infrastructure, schools, and hospitals, to stimulate the economy during a recession.
This will increase employment in targeted and support (materials, equipment, and supply chain) areas. In addition, a rise in consumer spending should lead to an increase in GDP.
Tax rates
The government can influence the "consumer spending" component of GDP through tax rate adjustments. As a result of reduced tax rates, consumers and businesses will have a greater amount of disposable income to spend on goods and services.
As consumption increases, goods and services become more in demand. To keep up with the demand, businesses hire more workers. Wage increases result in higher consumer consumption and disposable income because of the increased labor demand.
Risks of Government Stimulus Packages
Stimulus packages are government-led initiatives designed to stimulate the economy by directly intervening in it. These measures are often criticized by those who believe that capitalism is best with the least amount of government intervention.
A regime that wishes to enact a large stimulus package will have to incur significant debt to finance it. A high level of debt increases the risk of bankruptcy and can lead to a credit downgrade of a country's sovereign debt.
An administration should increase taxes and decrease spending to pay back the debt in years of economic growth. Sadly, this is seldom the case in practice, and debt levels continue to rise.
Furthermore, stimulus packages rely on expecting people to spend the increased disposable income. The economy, however, will not be affected in the way the government originally anticipated if consumer confidence remains low.
Coronavirus stimulus package
Let's see the package for some countries as an example.
United States of America
President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020.
The stimulus bill totaling approximately $2.2 trillion was designed to help individuals, families, small businesses, and industries affected by the economic slowdown.
The fifth round of this package was issued in December 2020. After that, in January 2021, President Joe Biden announced an emergency relief plan of $1.9 trillion
Under this plan, everyone received $1,400, except children and lower-income workers who received tax credits.
Other initiatives included paid sick leave, family medical leave for millions of workers, grants to small businesses, and $35 billion in low-cost loans, including ones for clean energy investments.
Each of these stimulus packages was designed to:
- Ease the economic hardship experienced by many Americans, particularly those on low incomes.
- Keep businesses afloat during this pandemic.
During the COVID-19 pandemic, economies went into recession, and extreme measures were needed to stabilize them.
United Kingdom
In June and July of 2021, as the U.K. emerged from the initial Covid lockdown, the government tried to stimulate demand and speed up economic recovery.
The announcement made by Chancellor Rishi Sunak on Wednesday, July 8, unveiled a 'Plan for Jobs' detailing the government's policies for this phase. This scheme was built on Boris Johnson's infrastructure investment plans.
These policies were aimed at boosting demand, especially in sectors adversely affected by social distancing. Further, it was anticipated that the scheme would help improve the infrastructure and assist those rendered jobless to find employment.
According to initial estimates, the policies included in the 'Plan for Jobs' cost around £20bn - or 1% of pre-pandemic GDP. Although significant, this stimulus package was smaller than other advanced economies like Germany.
- £2bn was spent on infrastructure
- £6bn on a Job Retention Bonus
- An additional £2bn spent on employment and job search programs
For each furloughed employee retained, firms received £1,000 in payment. The OBR estimates that the cost of the policies in that summer economic update was around £11 billion -- 0.5% of U.K. gross domestic product.
In addition to the Stamp Duty Holiday (estimated at around £3.3bn), the temporary VAT cut for hospitality and leisure (estimated at £2.55bn) and the Eat Out to Help Out scheme (estimated at £840m) was the most prominent fiscal stimulus policies announced by the British government.
Other Sectors
The other sectors include:
Help for hospitality and tourism
Many hospitality and tourism businesses had to close for long periods due to the Covid-19 crisis and social distancing guidelines.
The British chancellor acknowledged this in his summer 2021 speech, announcing two measures targeted at these industries.
From July 16, 2020, to January 12, 2021, the value-added tax (VAT) on takeaway food, non-alcoholic drinks, accommodation, and tourist attractions was reduced from 20% to 5%.
By lowering restaurant, pub, hotel, and theme park prices, the administration hoped to encourage people to spend more money. So the chancellor extended this from September to March 31, 2021.
As part of the Eat Out to Help Out scheme, which ran from Monday through Wednesday in August, the chancellor offered a 50% discount (up to a maximum of £10 per person) on restaurant meals.
It was anticipated that this measure would cost around £500m, but unexpectedly high take-up raised the cost to £840m.
Stamp duty cuts
Stamp duty, a tax on house purchases in the U.K., was raised from £125,000 to £500,000 in England and Northern Ireland. The amount of stamp duty on all houses sold for less than £125,000 was reduced or scrapped.
The scheme was designed to boost demand for new homes and other related products and services such as kitchens, bathrooms, furniture, and other decorating services. The scheme ceased on March 31, 2021.
Unemployment Kickstart Scheme
One of the most ambitious announcements the chancellor made for the unemployed was a " Kickstart " scheme.
It aimed to create new jobs that were to be subsidized by businesses for persons (aged 16 to 24) who had been claiming Universal Credit and were at risk of long-term unemployment.
Eligibility for the scheme required employers to provide a minimum of 25 hours per week of paid work for a minimum of six consecutive months.
The scheme was only available to firms that created new jobs, and employers were required to provide training and support to help the employee find a permanent job after this period.
For their efforts, the government paid the 'Kickstarter' the minimum wage for 25 hours a week. National insurance, pensions, and administrative costs, which amounted to around £6,500 over six months for someone in their early 20s, were also included.
The scheme's initial budget of around £2 billion was aimed at aiding nearly 300,000 people. However, despite the vast sums of money involved, the chancellor refused to put a cap on total funding.
This scheme was modeled on the Future Jobs Fund, an initiative used by the Labour administration to subsidize youth employment in 2009, which had been successful in helping people enter or re-enter the workplace.
Retraining and return to work initiatives
The British government invested around £1.6bn in initiatives to reduce unemployment. This included:
- Increased funding for careers advice
- Work search support
- Tripling of traineeship places was among these measures.
Furthermore, the chancellor increased payments to employers hiring new apprentices to £2,000 for under-25s (£1,500 for over 25s) until the end of December 2021.
He also allocated additional funding to help 18- and 19-year-olds who were studying for high-value level 2 and 3 qualifications (vocational courses equivalent to GCSEs and A-levels).
Government Stimulus Packages for Infrastructure and Investment
Some packages are:
Infrastructure spending
During his speech on June 30, Boris Johnson promised to 'Build, Build, Build' and outlined several measures to help the construction industry. Among those were reforms to the planning laws, which made it easier for commercial properties to be converted into residential properties.
Additionally, he proposed the establishment of a Construction Talent Retention Scheme to facilitate the redeployment of skilled construction workers who are at risk of losing their jobs.
However, one of the most important measures included in the speech was the promise to bring forward £5.6 billion in infrastructure spending. This sum was to be spent primarily on the maintenance and upgradation of hospitals (£1.5bn) and schools (£1.8bn).
Another £1bn was allotted for local projects while smaller amounts were set aside for maintaining courts and roads.
These prioritized projects were expected to be 'shovel-ready,' i.e., planned and implemented within a short amount of time to generate work and employment.
The administration also set up a new infrastructure delivery task force, "Project Speed," to ensure this happens. The chancellor headed it.
Capital spending has been a challenge for the government in the past, and some of these projects were re-announcements, including previously delayed projects.
Green reconstruction schemes
Several measures were taken in a bid to create jobs and to reduce the emissions of greenhouse gasses.
Green Homes Grants was a government initiative that provided grants of up to £5,000 to homeowners and landlords to cover up to two-thirds of the cost of making improvements to their homes so that they are more energy efficient.
Home insulation is one such project that received government grants of up to £5,000 from the Green Home Grants program.
Grants of up to £10,000 were also made available for low-income households to cover the full cost of these renovations. By the end of this scheme, it was hoped that 6,00,000 homes would be renovated, and the country would be able to meet its net-zero goals.
Originally, this scheme was scheduled to last until March 2021, but it was later extended from November 2020 to March 2022.
Reports have claimed that the scheme cost around £100 million in grants in the first phase and was likely to end up costing significantly less than the £2bn originally anticipated.
In addition to these energy initiatives, the administration has also created a £1.1 billion fund to improve the energy efficiency of public buildings, such as hospitals, schools, and social housing.
A general demand stimulus was not included in these measures, and there was no attempt to increase people's spending. The government instead targeted certain sectors to boost demand.
Several other countries took a different approach, such as Ireland and Norway, where spending vouchers were provided, VAT reductions were implemented (Germany), and payments were made to people on low incomes in Spain, Australia, and the USA).
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