Fiscal Stimulus

What is Fiscal Stimulus?

Fiscal stimulus refers to discretionary government actions — increasing public spending, cutting taxes, or both — intended to boost aggregate demand and economic activity, typically during a recession or economic slowdown. The theoretical basis is Keynesian economics: when private sector spending collapses, government spending can fill the gap and prevent a deeper recession. Stimulus multiplier effects mean that each dollar of government spending can generate more than one dollar of GDP growth, though the size of the multiplier is debated. Fiscal stimulus must eventually be paid for through future taxes or debt, raising questions about long-term sustainability and inflationary effects if the economy is already at full capacity.