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Austerity: Functioning, categories, and objections

[ecis2016.org] In this article, we will explain all about austerity and its signficance in ensuring the government’s financial health.

Austerity refers to a set of economic measures that a government has enacted to reduce public debt. Governments take this step when their public sector debt is huge and there is a greater chance of default or inability to repay the loan and meet obligations. 

Austerity is a tactic used to restore the government’s financial health and to maintain a nation’s stable economy. As the risk of default, or default risk as it is more commonly known, can quickly spiral out of control, the country falls deeper into debt, and lenders can charge a higher rate of return for future loans, making it even more difficult for the borrower to raise the necessary capital and pay off past debts.

Austerity: Functioning

When a government has financial instability, it is because its debts exceed the amount of money it receives. As a result, significant fiscal deficits emerge. The government’s debt level often rises in tandem with the government’s spending. The likelihood of default and incapacity to repay the debt rises. Lenders or creditors begin to demand larger returns on future loans to reduce the risk of failure. The government is responsible for repaying the debt and meeting its obligations to creditors. Certain actions must be implemented by the government in order to accomplish this.

Austerity measures are necessary when the government spends too much or incurs too much debt. The administration’s goal in doing so is to maintain the nation’s financial stability and a confident economy while also restoring balance to government budgets. 

The imposition of austerity measures indicates that the administration is willing to take action to repay the massive debt. This may persuade lenders to cut the interest rate on the debt.  

The 2008 global economic collapse exposed many governments to unsustainable expenditure levels and limited tax collections. Many European countries, notably the United Kingdom, Spain, and Greece, chose austerity measures to alleviate budget issues and pay off debts. 

Austerity became an essential measure in Europe during the global recession. At the time, European Union countries lacked the power to manage mounting debts by creating their own currency. As a result, their default risk increased, and several European governments were obliged by creditors to rein in their spending. 

Austerity: Categories

  • Increased taxation generates general revenue: This technique advocates more government expenditure and works towards stimulating growth through spending and capturing benefits through taxation.
  • Angela Merkel’s Model: This policy is named after German Chancellor Angela Merkel, and aims to raise revenue while reducing non-essential government operations.
  • Reduced taxes and government spending: The free-market supporters prefer this level of austerity.

Austerity: Concerns

Although the purpose of austerity policies is to reduce government debt, their effectiveness is questionable. Supporters argue that large deficits harm the economy and limit tax income.

Opponents argue that government programmes are the only way to improve consumer consumption during a recession. They argue that more public sector spending reduces unemployment and thus, increases the number of income taxpayers. 

Austerity works in opposition to some economic schools of thought that have been popular since the Great Depression. In an economic downturn, declining private income reduces a government’s tax revenue. Similarly, during an economic boom, the government sees an increase in tax income collection. It is ironic that public spending, particularly unemployment compensation, is needed more during a recession than during a boom. 

Austerity: Objections

Many experienced economists believe that the austerity measures pose numerous hazards to the economy and may cause more harm than good. Many people believe that lowering government spending will result in widespread unemployment, which is harmful to the country’s long-term economic health and prosperity. Austerity also contradicts several economic schools of thought that have emerged after the Great Depression. 

Austerity: Measure in India

The Union Budget for the fiscal year 2020–21 was presented with a budget of Rs. 30.4 trillion. It offers small concessions to big business and the wealthy while increasing austerity for the working class.

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Debora Berti

Università degli Studi di Firenze, IT

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