When the economy is going through recessionary tendencies, the government and the central banks will be undertaking recovery measures on their own ways. Expansionary fiscal and monetary policies is the traditional method to stimulate the economy and thus to escape from recession. Here comes the concept of pump priming, which refers to the higher expenditure using stimulator step by the government.
What is pump priming?
Pump priming refers to the collective stimulatory measures taken by the government by undertaking higher expenditure and tax cuts. In most occasions pump priming is done by making higher government expenditure in relatively small amounts; but for a considerable time period.
The terminology of pump priming intends that the economy should be primed to function back to the high level. This can be possible when the government makes some extraordinary stimulatory measures by the government:
(i) Higher expenditure by the government pumps funds into the economy.
(ii) Reduced taxes allow individuals and entities to increase their expenditure-consumption and investment, and this also pumps funds into the economy.
Pump priming thus brings back economy activities through higher spending and higher public consumption and investment promotion activities by the government. Mostly, the policy refers to the activities of the government.