Measures to stimulate the economy

First posted on 22 Nov 2008

Most countries adopt the following measures to stimulate a slowing economy:
> capital spending, e.g. build infrastructure, roads, bridges, etc
> reduce tax, i.e. consumption, income or profit tax
> give cash cheques to consumers to spend

Which method is better? I believe that a combination of measures are necessary. A lower rate of consumption tax (e.g. GST) will encourage people to spend and will stimulate the economy. Cash cheques for consumers may results in some of the money being saved, and not used for spending. But it can help the cash flow of the lower income people.

So far, no country has adopted the following measure (which is my preference):
> give a credit line to consumers at a low rate of interest - subject to a cap.

This credit line, which is given to someone who has lost a job, can help to pay the mortgages and meet the monthly expenses. It reduces borrowing on credit cards or other sources that can add to the interest burden. This credit line will encourage the people with jobs to continue their normal spending (as they do not need to increase their savings in case of retrenchment). More details in this article.

In many countries, there is no need for this relief loan as the retrenched workers can get unemployment benefit. This scheme is important for many Asian countries that do not have unemployment insurance.