In COVID 19, though stimulus fiscal policy will help to boost
the economy, it may also come with certain risk:
- Fiscal policy may take a longer time to implement. And full
benefits of stimulus fiscal policy may be analyzed after a
decade.
- Stimulus fiscal policy may lead to Ricardian equivalence. This
means that when government increase its spending, consumers may
estimate that future taxes will rise in order to finance government
deficits and they may decrease their present spending. Decrease in
consumer spending will not increase aggregate demand and hence GDP
will not rise.
- Stimulus fiscal policy may also lead to crowding out effect.
Increase in government spending will decrease private investment.
This means that government spending will result in high demand of
labor and there will be an increase in wages. Increase in wages
will result in loss for the business. As a result private
investment will decrease.
- In order to implement stimulus fiscal policy, government may
borrow from financial markets, this will increase government
debt.
Therefore, all these risks are associated with stimulus fiscal
policy that are being implemented by many countries in order to
fight COVID 19.