Stimulus

Stimulus can be fiscal or monetary. Fiscal stimulus involves increased government spending, tax cuts or direct payments to households and businesses. Monetary stimulus involves cutting interest rates, quantitative easing or other measures that make credit cheaper and more available.

The idea is that when households and businesses cut back on spending during a downturn, the government or central bank can step in to support demand, protecting jobs and incomes and helping the economy recover faster.

For example, during the COVID-19 pandemic, many governments introduced large stimulus packages, including wage subsidies, payments to households and loans to businesses, while central banks cut interest rates and bought large quantities of bonds.

Stimulus is usually most effective when it is timely, targeted at people and businesses likely to spend, and temporary. Critics warn that stimulus can add significantly to government debt and, if too large or too prolonged, can contribute to inflation. Debate often centres on how large stimulus should be and when it should be withdrawn.