To control deflation, steps to increase overall effective demand, equalizing output of goods, income and employment within an economy, have to be taken. In other words, measures to increase consumption, as well as investment expenditure, must be brought into force. Some of the measures possible to achieve such increases are:
- Reduction of Taxes
Reducing the taxes levied on certain commodities will result in increasing spending power of the population. Tax relief for businesses will encourage investment.
- Redistribution of Income
The marginal tendencies to consume can be raised by redistributing income and thus reducing the gap between rich and poor. This can be achieved by adjusting income tax levels to the levels of income, e.g. High incomes will be taxed higher than low incomes. This will again result in an increase in aggregate demand.
- Public Debt Repayment
Old public debts can be repaid by the government during a period of deflation, resulting in increased spending power and effective demand.
- Business Subsidies
Government subsidies to businesses will encourage investments.
- Public Works
Expenditure within the public sector can be increased through public works schemes. These schemes should, however, serve to supplement, not supplant private investment.
- Deficit Financing
Public works schemes can be financed via deficit financing, in other words, printing more money. This means the government adopts a budgetary deficit and covers it through deficit financing. This will supply sufficient resources to the government without having an adverse effect on private sector investments.
- Interest Rate Reduction
Reducing interest rates stimulates investments and expands economic activity.
- Expansion of Credit
Easily available bank credits encourage investment and promote industry and business in general.
- Foreign Trade
Increased exports and decreased imports will reduce over-production and aid in overcoming deflation.
- Production Regulation
Production is adjusted to coincide with existing demand in order to avoid over-production.