Expansionary fiscal policy is used by government during recession to increase the levels of

aggregate demand. The government may do this through an increase in government spending or

through a reduction in taxes. During this recession, the economy of the country is said to be

producing below its preferred potential GDP and the government is expected to use the

expansionary fiscal policies to the rise the GDP to its potential levels.

Expansionary policy is appreciated during recession because it’s during this period that the

government will see it fitting to reduce taxes. These taxes may be business taxes or income taxes.

When taxes are cut for here in Uganda income tax is valued at 9% but is the economy is facing a

recession and salaries are cut and yet the income tax is not cut meaning that a person earning

UGX500, 000 a month will pay about UGX 50,000 on income taxes, this will live employees

with less disposable income and discouraged consumption since they have les to spend and this

shift the aggregate demand curve to the left. But if the 9% income tax is reduced to 2% during a

recession, a lot of money will be put in people’s hands as disposable income which will

encourage consumption hence shifting the demand curve to the right and also cause a rise the

GDP.

Expansionary fiscal policy is also used during recession and it helps to reduce on unemployment.

The government reducing the VAT on firm products let’s say from 18% to may be 10% will

encourage firms to produce more and if firms’ production increases, demand for worker will also

increase which in return reduces on the unemployment . Also with high aggregate demand and a

strong economic growth, few firms will go bankrupt which means there will be few job losses.

(Pettinger, 2019)
Expansionary fiscal policy is also preferred during recession because it puts money direct into

consumer’s hands hoping that it will stimulate spending. This is done by increasing giving grants

to individual by government expecting nothing in return with the hope that this money will be

put to consumption so that firms are kept into the market.

In conclusion, expansionary fiscal policy helps business owners feel that the economic activities

in the country will rise and also shift the aggregate demand curve to the right which in turn

increases the GDP and this also restores the confidence the government has in its economy.

References

Pettinger, T. (2019). Policies for reducing unemployment – Economics help. Economics Help.
https://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/

Ritternberg, L. and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under Creative
Commons by-nc-sa 3.0 https://creativecommons.org/licenses/by-nc-sa/3.0/