The effects of austerity on:
What is austerity: difficult economic conditions created by government measures to
reduce public expenditure.
Goal of Austerity: Governments spend less money than what they have and therefore it
results in a large government surplus. They need to increase taxes/ reducing
government expenditure.
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Results of austerity is an inxard shift from ad1 to ad2
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Which means a shift in national output to Yinfl
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It also leads to a decrease of price levels from PL1 to PL2
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Income equality
Income equality connects to one economics key concept: equity- which refers to
fairness and justice. The implementation of fiscal austerity leads to higher income
inequality. This is due to the rise in taxes, the decrease in benefits (affects the poorer
households more) and overall cuts the economic wellbeing of the people. Moreover, it
leads to large scale unemployment, in Italy there was fear of a pending recession.
Another point is that by cutting everyone’s spending when implementing austerity, one’s
income falls, except the rich, where it will create a wider economic divide, their wages
will not fully decrease, however those who depend on monthly wages will be more
effective. Moreover, austerity slows down economic recovery, and extends the length of
the 2008 crisis.
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GDP
Due to economic austerity, income will decrease, therecore decreasing consumption:
one of the key components that make up GDP. Moreover, government spending will
aslo be decreasing and therefore, GDP should slow down or decrease. Due to this, the
GDP growth will start to slow/decline as less money is being used in the economy.
Therefore, economic austerity could lead to a recession, which leads to more
unemployment and lower wages. Overall, GDP decreases when contractionary fiscal
policy is implemented. It will also have a leftward shift on the diagram.
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Debt
Seeing that austerity is used to decrease the potential of a debt crisis, it will increase
debt. The government will have more savings, and therefore prevents higher debt rates.
Austerity happens when there ae large debt-to GDP ratioes, and thus used as a
preventive measure against increasing debt. Although, it does end up slowing
economies down.
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Effect of of automatic stablizers
Automatic stabilizers are implemented in the government spending that increase
spending or decrease taxes the there is a slow econoym growth rate. Therefore, it
prevents huge drops in consumer spending. When an eocnomy is in an recession, and
is a tool from the keynesian eocnomy that is implemented to increase/ support
aggregate demand. However the the government austerity programs are much larger
than the automatic stabilizers, it will not be very effective.
1) Effectiveness of austerity in point of view of new monetarist
Nial Ferguson, a new monetarist economist argues that in order to solve deflation,
austerity should be employed and therefore save government spending and increase
taxes. He disagrees with Keynsian economy and argues that the use of timulating
policies could lead to staglflation, where deflation ends up being double digits and nd
even slower rate of GDP. New monetarist argue that injecting money into the economy
is risky and does not work. Overall, in the point of view for new monetarist, austerity
works well in times of debt crisis, even though ti risks higher unemployment.
2) Efectivess of austerity in the point of vew of Keynesian.
Paul Krugman is a Keynsian economist and he argues that austerity will lead to a third
depression. If governments choose to implement austerity it will further shrink the GDP.
Moreover unemployment will become dangerously high, and it wîll lead to further
economic issues. In order to stop the economy from slowing to a dangerously slow rate,
putting money in the economy is the way to solve the ongoing eocnomic crisis. And the
problem that is leads to, can be solved after, but the priority is saving the economy.