This document discusses how fiscal policy can be used to prevent economic recession. It defines fiscal policy as taxation, expenditure, and borrowing by the government. During a recession, characterized by high unemployment and falling GDP and prices, expansionary fiscal policy can play an important role. The government can increase spending on public works projects to directly and indirectly boost income, consumption, output and employment. It can also enact tax cuts to increase disposable income and aggregate demand. These fiscal stimulus measures utilize the multiplier effect to help pull the economy out of recession through discretionary policy changes and automatic stabilizers in the tax system.

1. Fiscal policy as a means to
prevent Recession
BY
MANGESH PATIL
JAYESH BHANDARI
ANKUSH MOGAL
SHREEGANESH SARVE

2. DEFINITION
 Fiscal policy refers to the taxation, expenditure and
borrowing by the Government.
 It is the most important instrument of government
intervention in the economy.
 Three basic objectives –
1. Ensuring price stability
2. High output and employment level
3. Economic growth

3. Recession
 The fall in general price level is called ‘Recession’.
 This is a phase of a Business cycle which succeeds
the phase called ‘Peak or Maturity’.
 This phase is characterized by following points-
 High rate of unemployment
 Substantial decrease in GNP
 Fall in prices
 Underutilised excess capacity

4. Illustrations of recessions
 Great depression(1929-1933)
In US, Unemployment rate -3.2 to 25 %
GNP –Fall by 30 %
 Recessionary situations in 1964,1984
 Japan – 1990s period of sustained recession
(huge amount of savings)
 World recession 2008 (sub prime crisis)
 Eurozone crisis

5. Process of Recession
 Peak Period in the Economy
 Wave of pessimism amongst investors regarding the
mechanism of profit making in the market.
 Lesser investments
 Low aggregate expenditure and demand
 Low national output
 Cyclical unemployment
 Depression

6. Graphical presentation of recession

7. Need of fiscal policy in tackling recession
 Superiority of fiscal policy to monetary policy
 Monetary policy depends upon interest rates
 Unemployment and pessimism in economy
 Direct effect on income, employment, expenditure
and output.
 ‘Attack is the best defense’-Maintain full
employment with gradually rising price level

8. Expansionary fiscal policy
 Discretionary fiscal policy
 Deliberate change in government expenditure and taxes
to influence national output and prices
 Non-discretionary fiscal policy
 Automatic stabilizers-Built-in tax or expenditure
mechanism which automatically increases aggregate
demand in recessionary times.
1. Personal income tax
2. Corporate income tax
3. Transfer payments(unemployment compensation)
4. Welfare benefits

9. GOVERNMENT EXPENDITURE TO THE RESCUE
• Discretionary fiscal policy
Increase in expenditure by starting public works.
Ex.- Building roads, dams, ports, irrigation works,
electrification of new areas etc.
Two effects
 Direct effect:- Increase in income of material suppliers &
labors
 Indirect effect:- Increase in disposable income and
consumption expenditure
-Greater output, income and employment
- increase in transaction demand for money

10. Graphical presentation

11. Reduction in taxes
 Indirect effect
 Increase in disposable income and hence marginal
propensity to consume
 E.g. Government reduces Rs. 200 crores of tax
people have Rs.150 crores as disposable income
(MPC=.75)
 Keepin Govt. Expenditure constant, an upward shift
in C+I+G curve.
 Decreased taxes =Increase in income, output,
employment

12. Illustrations
 1964-US president John F. Kennedy waived off $12
billion worth of tax liabilities.
 1984-US prez Ronald Reagen ordered reduction in
taxes

13. Multiplier effect
 Tax multiplier
(Change in Taxes × MPC/ 1-MPC)
 Government expenditure multiplier
(1/1-MPC)
 Tax multiplier < Govt. Expenditure multiplier

14. Other measures
 Encouraging personal savings and
investment(Retained profits reinvesting in the
economy)
 Encouraging entrepreneurs

15. THANK YOU