In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt. “Austerity” was named the word of the year by Merriam-Webster in 2010.
Reasons for taking austerity measures
Austerity measures are typically taken if there is a threat that a government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue or they have been legally forbidden from issuing their own currency. In such a situation, banks may lose trust in a government’s ability and/or willingness to pay and either refuse to roll over existing debts or demand extremely high interest rates. In such situations, inter-governmental institutions such as the International Monetary Fund (IMF) may demand austerity measures in exchange for functioning as a lender of last resort. When the IMF requires such a policy, the terms are known as ‘IMF conditionalities‘.
Development projects, welfare, and other social spending are common programs that are targeted for cuts. Taxes, port and airport fees, and train and bus fares are common sources of increased user fees.
In many cases, austerity measures have been associated with protest movements claiming significant decline in standard of living. A case in point is the nation of Greece. The financial crisis—particularly the austerity package put forth by the EU and the IMF— was met with great anger by the Greek public, leading to riots and social unrest. On 27 June 2011, trade union organizations commenced a forty-eight hour labor strike in advance of a parliamentary vote on the austerity package, the first such strike since 1974. Massive demonstrations were organized throughout Greece, intended to pressure parliament members into voting against the package. The second set of austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favor. However, one United Nations official warned that the second package of austerity measures in Greece could pose a violation of human rights.
Contemporary mainstream economists consider macroeconomic policy in a dynamic stochastic general equilibrium (DSGE) framework, where fiscal policy is discussed within an optimal taxation framework that assumes a representative agent is optimizing over a long-term horizon. The reasoning behind such models is that the effect of any government deficit is mitigated by compensatory changes in the representative agent’s spending decisions. This occurs because the agent will be responsible for paying off that deficit in the future. Thus, from a modern mainstream macroeconomist’s point of view, reducing government deficit allows the private sector to consume more and support the economy. This viewpoint stems from their belief in the existence of a general economic equilibrium, which predicts that economic fluctuations revert back toward a “normal” state of affairs automatically. For this reason econometric models that are used in economic forecasting are calibrated to show convergence to full resource utilization and employment despite government’s fiscal tightening.
Old-Keynesians, such as Alvin Hansen, had a totally opposite view: they argued that government deficits provide the private sector both with new money for saving (the deficit) and a means to save (government interest-bearing bonds), increasing private sector wealth, and this wealth effect would reduce the need to save from current income. In their view government debt enabled the private sector to continue consuming. It was therefore not a burden, at least when held domestically, but a necessity. This approach has interesting parallels with Richard Koo’s recent concept of balance-sheet recession.
According to modern monetary theory austerity measures by a national government are usually counterproductive because neither taxation nor bond issuance act as a funding mechanisms for the government. Instead, all spending is done by crediting bank accounts, so national governments cannot run out of money unless they have fixed exchange rate to either foreign currency or gold, or they do borrowing in foreign currencies or they are part of a larger currency area like the eurozone where they do not have the right to issue money.
“Austerity measures brings health to the balance sheets by reducing debts which is followed by short term credit crunch but is countered by an expansion of credit when goals are met multiplied by the creation of wealth.” – Contributed by Oogle.
“紧缩措施带来的健康，其次是短期信贷紧缩，但由信贷扩张乘以创造财富的目标是满足时反驳减少债务的资产负债表。” – 提供者Oogle。