Economic Fiscal policies
Recession is an economic cycle of contraction when economic activities decline sharply. It is restored by the application of fiscal policies: expansionary financial system, and contractionary economic policy. The government expansionary fiscal policy stipulates that the government expenditure on national projects, social welfare, and insecurity is higher compared to collections from tax revenues. The government can increase spending by borrowing money from commercial banks to inject into the economy through investment projects.
Expansionary Fiscal Policy
When demand (AD) aggregate increases stridently, making the equilibrium to shift above GDP, this increases the inflation rate in the market. The fiscal policy to adjust this would be the application of expansionary fiscal policy, applied by the introduction of high taxes and less spending. Focusing on tax, an increase in aggregate demand ensures that employees’ and firms’ income increases. An increase in aggregate demand simultaneously increases tax payments. However, more robust aggregate demand generally translate to lower levels of unemployment and fewer layoffs, this saves government spending on unemployment allowances, medical covers, and other economic stimulus programs
Contractionary Fiscal Policy
When aggregate demand falls considerably to the extent that a recession is experienced, then the economist and policymakers will apply expansionary fiscal policy— tax cuts and government spending increases. When aggregate demand levels fall, and high unemployment levels in the economy will decrease incomes and firms’ profits, this effect will lead to the decline of tax collections. The situation of high unemployment and fragile economy necessitate the government to increase spending on economic stimulus programs, providing economic benefits to unemployed people and generally improving their social welfare.
A government can reduce the budget deficit whereby there shall be more significant taxes and lower expenditure. This contraction of the economic policy will likely lead towards lower aggregate demand, which in turn will lead to lower economic growth and less inflation.