Definition
Fiscal stimulus is the deliberate use of the government budget — through increased public spending, tax cuts, or transfer payments — to raise aggregate demand when an economy is operating below its potential. The aim is to put idle resources back to work by giving households and firms more income to spend.
It is a discretionary tool, distinct from automatic stabilizers that adjust on their own. Stimulus is typically deployed during recessions, when private spending is weak and the central bank's interest-rate tools may be losing traction.
Why it matters
How it works
When the government spends or cuts taxes, recipients spend part of the extra income, the next recipients spend part of theirs, and so on — the multiplier effect. The size of the boost depends on how much of each dollar is spent rather than saved, how much leaks abroad, and whether the economy has slack to absorb the demand. Stimulus is most effective when targeted at those likely to spend, delivered quickly, and withdrawn once recovery is secure. If it runs too long, it can push demand past potential output and create inflationary pressure.