Stimulating the economy

There is economic slow down in most of the countries currently i.e. early 2009. These countries try to stimulate the economy by

• Lowering interest rates
• Giving tax benefits
• Offering incentives to industries

By lowering interest rates for housing loans, vehicle loans etc. the governments try to encourage people to avail of the loans which in turn leads to construction of  houses, production of vehicles etc, thus reducing unemployment. But at the same time, people who deposit their money in the banks receive lower interest and thus the disposable income with them comes down leading lower consumption expenditure- lower retail sales, low demand and low production.

Giving tax benefits would make the companies and individuals to have additional money, but the governments would lose tax revenue and thus will not be able to undertake large infrastructural work.  Instead of reducing taxes, the governments can undertake infrastructural work and generate employment and additional spending.

Offering incentives would again reduce the government funds. It is likely that many of the industries would reduce the ex-factory prices of their products.  They would however result in lower cash balance with the governments and  lower government spending which is not good for the economy.

Cost of the production should be reduced by increasing the productivity of the employees. This could be done by requiring employees including the top managements in all the establishments in the country as well as self employed persons to work for additional one hour a day without any increase in salary.