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. - Results of austerity is an inxard shift from ad1 to ad2 - Which means a shift in national output to Yinfl - It also leads to a decrease of price levels from PL1 to PL2 - 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. - 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. - 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. - 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.
