Economic Growth & Recession

A government can use all of its policy toolkits to lift growth, and the right mix depends on whether the problem is too little demand or too little capacity.

• Expansionary fiscal policy. Cutting taxes or raising government spending increases total demand, encouraging firms to expand output and hire. Most useful when the economy has spare capacity, but if overused it can cause inflation.
• Expansionary monetary policy. Cutting the interest rate lowers the cost of borrowing, so households spend more and firms invest more, raising total demand. It works with a lag and loses traction if rates are already very low.
• Supply-side policy. Spending on education, training and infrastructure, cutting direct taxes, and deregulation raise the economy's productive capacity, allowing growth that does not push up inflation. This is the long-run route to growth, but it is slow to take effect.

In practice a government combines these. Demand-side policies are the quicker response to a recession; supply-side policies are the durable way to raise the economy's long-run rate of growth.