What are the risks of using expansionary policies (like low interest rates or tax cuts) for too long during economic recovery?
Answer (1)
Expansionary policies such as low interest rates, government spending, and tax cuts are very useful tools during a recession. They help stimulate the economy by making it easier for people and businesses to borrow, spend, and invest. However, if these policies are used for too long, they can create serious risks—especially high inflation, rising debt, and economic bubbles.First, keeping interest rates too low for too long can overheat the economy. If people and businesses borrow too much, demand for goods rises faster than supply, causing demand-pull inflation. In the Philippines, this could mean prices of food, housing, or fuel increasing faster than wages.Second, prolonged expansionary policies can increase government debt. For example, if the Philippine government continues to spend heavily without raising taxes or increasing revenue, it may need to borrow more. Over time, debt repayment becomes a problem, and future generations might suffer from reduced public services or higher taxes.Third, too much easy money in the system can cause asset bubbles. If interest rates are low for years, people may invest heavily in real estate or stocks. Prices rise quickly—not because of real value, but because people expect prices to keep rising. When the bubble bursts, people lose money, businesses close, and jobs are lost.For example, before the 2008 financial crisis in the U.S., easy credit caused a housing bubble. In the Philippines, property prices in some areas like Metro Manila have also shown signs of overheating, especially during periods of high credit growth.So while expansionary policies are helpful, they must be used with caution and time limits. Policymakers must know when to “step on the brakes” and return to normal conditions to avoid long-term damage.
