Austerity

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Austerity measures (political-economics) are government actions that try to reduce government budget deficits. They do this by spending less, increasing tax, both, or some other clever ways.[1][2][3]

Austerity measures are used by governments that find it difficult to pay their debts. The measures are meant to reduce the budget deficit by bringing government revenue closer to spending.

In most macroeconomic models, austerity policies generally increase unemployment as government spending falls.[4][5] Decreased government spending reduces public and maybe private employment. Also, tax increases can reduce consumption by cutting household disposable income. Some say that reducing spending may result in a higher debt-to-GDP ratio because government expenditure itself is a part of GDP.

For example, after the Great Recession, austerity measures in many European countries were followed by increasing unemployment and debt-to-GDP ratios despite smaller budget deficits.[6] When an economy is operating at or near capacity, higher short-term deficit spending (stimulus) can cause interest rates to rise. This results in a reduction in private investment. This then reduces economic growth. Where there is excess capacity, the stimulus can result in an increase in employment and output.[7][8]

Related pages[change | change source]

  • Functional finance
  • Neoliberalism
  • Planned shrinkage
  • Trickle-down economics

References[change | change source]

  1. "Austerity measure". Financial Times Lexicon. Archived from the original on 22 March 2013. Retrieved 1 March 2013. Cite uses deprecated parameter |dead-url= (help)
  2. Traynor, Ian; Katie Allen (11 June 2010). "Austerity Europe: who faces the cuts". London: Guardian News. Retrieved 29 September 2010.
  3. Wesbury, Brian S.; Robert Stein (26 July 2010). "Government Austerity: The Good, Bad And Ugly". Forbes. Archived from the original on 29 September 2010. Retrieved 29 September 2010. Cite uses deprecated parameter |dead-url= (help)
  4. "Austerity – Pros and Cons". Economics Help.
  5. "What is austerity?". The Economist.
  6. House, Christopher; Proebsting, Christian; Tesar, Linda (2017-04-11). "Austerity in the aftermath of the Great Recession". VoxEU.org. Retrieved 2019-07-18.
  7. Krugman, Paul (15 April 2012). "Europe's Economic Suicide". The New York Times.
  8. Laura D'Andrea Tyson (1 June 2012). "Confusion about the Deficit". New York Times. Retrieved 16 May 2013.

Other websites[change | change source]