Fiscal Policies to Combat Recessions - Assignment Example

Fiscal Policies to Combat Recessions Current recession has been a threat worldwide and it has touched almost all the industries. The recession has left many people jobless and has created a bad impact on the country’s economies. All the countries have suffered recession and are trying to overcome it. Present situation has lead to a state where the government has to take a proper decision to tide over the situation. New policies and different strategies are being implemented to come out of the recession. (Townsend 1983). As the downturn is worldwide, it has affected the exchange and import rates. Most of the countries depend on the resources and facilities from other neighboring countries. But this downfall has stopped exchange among the continents. Recession has created an impact on the banking sector, financial institutions and other credit related industries. Recession has occurred in the past also, but was not so severe like the present recession. The financial crisis started in America and then prevailed to the other countries. This in turn affected the development in all the countries. Though the previous recessions has incurred loss and lead to unemployment, this time it has been more than the previous recession. There is a dramatic increase in the unemployment rate and this has lead to the increase in debts. Financial stability has gone down which left many companies at a sad state. Financial policies should suit the current recession and must help in improving the financial crisis. Government has taken measures to improve the financial situation.(Nigam 2009). As the financial industries were the worst hit by recession, the companies which were depending on those financial services went down immediately. Economic depression has been prevailing from the downfall and it is still in the improvement state. Although most of the financial concerns tried to overcome the recession, they could not completely get back to the stage before recession. Economics deals with the management of funds and cash policy, where as natural science deals with the inventions and discoveries of theories and they are put to practical use. Policies and Practices during Recession During this recession, many new policies and strategies were introduced by the government to improve the situation of the industries as well as the economy. Established concerns and the ones with a better financial background only survive the recession. Other small and financially not so strong companies had to wind up their business.(Burgan 2002). As they could not bear the recession and its effects, many people were pushed out of their job. Keynesian Economics Out of the various policies, only some could help in improving the current situation. One among them is Keynesian policy, which mainly concentrated on the economic status. Keynes introduced a system which had a simple and basic strategy. His main aim was to uplift the country from the economic depression. In this Keynesian policy, the expense of one person is another person’s income. Again that person’s expense will indirectly help in the income of some other person. (Reuss 2009). This in turn will help many people. It is a cycle that will enable to support in the economy’s improvement. This should continue till the situation improves and the income of everybody increases. But this was a drawback when the recession very badly hit the nation. People were not ready to spend their money and the economic situation came to a standstill. Keynes then proposed a system where government has to take the initiative to help the public. This can be done by enhancing the money flow and by increasing the income in the market. Even this policy seemed to be a disadvantage, as not many of the governments agreed to spend extra money on the market’s enhancement. The Keynesian solution stimulated the aggregate demand. It did not help in keeping the public spending under control, as individual’s money was used as an income to another person. Thus it was disadvantage to the public. But it enable din the better functioning of the market, since some or the other kept spending. The money of the public was used to tide over the situation. The economy slowly started to improve. Keynesian theory specified that instead of saving the major part of the income, it can be distributed to help others which in turn will enhance the economy. Saving the money will help only that part of the society; where as spending it will prove to be a better option. Fiscal Stimulus Many countries introduced a fiscal stimulus packages that would help the economy. These stimulus packages depends on each country and should be decided based on the country’s financial situation. The service tax has been reduced in many countries. As people do not have a stable income, it is difficult for them to pay tax for all things. Hence, government has decided to decrease the rate of existing service tax. The excise duties of many products have also been cut down. The states had then option to borrow from the government and aided institutions.(Seidman 2003). These policies helped to a certain extent, but could not revive the economic level. Various economists criticized the plans designed by the government and its effects. These fiscal stimulus packages enhanced the economic rate of the country despite the downfall. The economists started to discuss about the fiscal stimulus and its advantages and disadvantages were revealed. They criticized saying that these stimulus will not help in the long run. This can be used as a substitute which can help for a limited period of time. If the system has to develop the current financial situation and to bring it to a stable state, a proper planning and policy is needed. (Korens 2009).The new classical economists felt these practices would have served in the past years, but in the recent times the situation is completely different. Stimulus is used to improve the recession and to enhance the countries situation. Government cannot lend a helping hand in all the circumstance. Hence the help from public is also needed. Keynesian theory has not been agreed by all the economists. Crowding out is another option to enable the company to recover from the recession. Here the investment of the people is distributed instead of keeping it stagnant at one place. This may increase the money flow and market will have rotational funds. This is used by fiscal policy to increase the demand at times of severe recession. But this may not be effective in all circumstances. The fiscal plan in which the tax is either reduced or increased, the public will not spend much on these things. Instead they will prefer to save the money for their future use. They are more worried if they spend now and it may lead to deficit in the near future. Due to recession, there has been a severe loss in all industries people do not want to take a risk by spending much now. Some government has increased the rate of interest in the investments. The public may tend to deposit their money in investments so that they can receive better benefits. They have also increased the rate of interest in loans. If the people borrow money from bank, they have to pay a higher interest, which can be used by the bank to help the government in closing the debts. Fiscal stimulus is generally crowded out to easily manage the economic slowdown. Only under very difficult situation would a government choose to crowd out the stimulus. This crowding out of fiscal stimulus can serve the nation in a much better way than any other policies. It has been practiced in many countries and it has been effective. The fiscal stimulus crowding option will help for a couple of years, till the economy comes to a normal level. Any new strategy should be adapted with much care, as the situation is bad and selecting a wrong policy many bring down the economy further. The normal tendency of the people is to expect what they will get in the future. They are cautious in investing or spending the money and think of their previous experience of investment. Crowding out purely depends on the confidence level of the country and the government. They must be prepared to face the challenges that may arise by implementing the crowding out plan. (Hall 2003). If the government is not sure of returning the public money at correct time, they must not select this option as it may increase the expense. This will worsen the current situation. If any country is going through a tough time and not able to repay their debts, they should not follow the crowding out methodology. Countries those are confident enough that they can manage the situation, can make use of the crowding out of the fiscal stimulus. A fiscal stimulus can be introduced and implemented for 3 to 4 quarters in a year. Again they have to propose new systems to take care of the next coming years. In the current situation crowding out alone will not achieve good results, governmental help is also important. Government must take steps to help the banks which have been worst affected. Recession is like a cycle, if country is affected, the other countries which depend on that particular country will also have to face recession. Any country should be prepared to face such recessions and should have some funds that can be made use of in this situation. Financial industries went through a bad time and it affected the other industries. Recession has affected all parts of the world. Reforms are being made at the bank and they are following the guidelines to improve the economy. Global slowdown has lead to the reformation of the existing banking policies. Private Banks and the government aided banks also went through the recession phase. (Gacson 2009).Foreign banks were also affected, but their capital investments and returns are more when compared to other Indian private sector banks. Indian banks do not have this provision of using the capital for their debts or unexpected situation. Hence the situation in India is very severe. The reforms made by the Reserve Bank of India, has improved the situation. Many policies and interest have been slashed down to enable the government to face the recession without much trouble. Surveys have indicated this recession has been the severe recessions when compared to the recessions that happened in the past. Layoff has been more and cost cutting have enabled the company to save some amount to pay off their debts. During this recession, the companies adapted new and time tested strategies to do a makeover to their company. The workforces have been well focused and trained to tackle the current situation. Reference Townsend, A ., (1983). The Impact of Recession on Industry,Employment and the Regions, 1976- 1971. London: Leopard and Grad Publications. Seidman, L., (2003). Automatic Fiscal Policies to Combat Recessions. New York: M.E.Sharpe Inc. Hall, M., (2003). The International Handbook on Financial Reform. U.K: Edward Elgar Publishing. Burgan, M., (2002). The Great Depression. U.S.A: Compass Point Books. Nigam, A., 2009. Current Recession: How Far, How Deep?. The Views Paper. [Internet] 18 February. Available at: http://theviewspaper.net/current-recession- how-far-how-deep/ [Accessed 8 December 2009]. Korens, R.J., 2009. Government Response Much Greater in Recession Than During Great Depression. [Online]. Available at: http://www.allbusiness.com/economy- economic-indicators/economic-conditions-recession/13341460-1.html [Accessed 8 December 2009]. Reuss, A., 2009. The General Theory and Current Crisis: A Primer Keynes. [Online]. Available at: http://www.dollarsandsense.org/archives/2009/0509reusskeynespartI.html [Accessed 9 December 2009]. Gacson, C., 2009. The Current Recession: How Bad Is It? [Online]. (4). Available at: http://research.stlouisfed.org/publications/es/09/ES0904.pdf. [Accessed 9 December 2009]. Read More