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What Are the Pros and Cons of Fiscal Stimulus?

Felicia Dye
Felicia Dye

The most positive aspect of a fiscal stimulus is, that when it is effective, it can completely change a nation's course. It can protect the capital markets and result in an improved standard of the living for the populace. These benefits commonly require a government to increase its debt, which is commonly repaid by taxpayers. Stimulus policies are also commonly prone to politics. If an ineffective stimulus measure is put into action it can make a bad economy worse.

The specific pros and cons of fiscal stimulus vary depending upon the policy that is being considered. This can be seen as a drawback of the idea of governments attempting to artificially stimulate an economy. When analyzing a given policy, the aspects that are negative in one setting may be positive in a different economic setting. Stimulus polices are rarely absolute, meaning that they generally cannot be relied upon to always function in the same manner and to produce consistent results.

Woman holding a book
Woman holding a book

A fiscal stimulus can have drastic effects on an economy, which may be good or bad. If an effective policy is implemented, a nation's economic condition can be put back on course, which should positively affect the lives of a lot of people. On the contrary, if an ineffective policy is implemented, a bad situation can become much worse and the resulting negative effects may be long term.

The implementation of a fiscal stimulus can pacify hesitant investors. Many people are unaware that investments are a vital part of most developed economies. Without these individuals providing their financial support, the pace of development will generally decrease, which can have rippling negative effects. When a government is willing to take action to improve or stimulate an economy, however, it often serves as a sign of assurance that prevents investors from withdrawing or withholding their money from a nation's capital markets.

A fiscal stimulus tends to attract a substantial amount of attention from the populace. As such, these measures are subject to the contamination of politics, which can affect the decisions that are made. In some instances, policies are formulated based more on politician's concerns about their jobs than on genuine confidence in a given stimulus. When this is done, the long-term welfare of the nation is often jeopardized.

Another drawback of a fiscal stimulus is that such a policy often involves a government increasing its debt. When a nation's economy is suffering, its government is also generally in financial straits. To carry out a stimulus, therefore, commonly involves borrowing money, which will eventually need to be repaid. The burden of that repayment often falls upon taxpayers, and in some cases, they are taxpayers of a later generation who did not help to create the problem or benefit from the stimulus.

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