search Nothing found
Main Dictionary A

Austerity

Austerity — a complex of political measures implemented to control the national debt. Governments introduce austerity measures when there is a high risk of default and failure to perform state obligations. The main goal of these measures is to restore the health of the economy.

 There are three types of the austerity measures:

  • Increase of taxation. This method allows the state to bring the money back to the economy and replenish the budget. As a middle ground, the government may introduce progressive taxation because this will be less burdensome for economically disadvantaged people. 
  • Reduction in taxes and lower government spending. This method is aimed to delegate the part of governmental functions to the business and stimulate entrepreneurship. Also, it helps the government to get rid of nonessential functions.  
  • Angela Merkel’s method. This method is dubbed after the German chancellor, it includes an increase in the taxation and cutting the unnecessary functions. Angela Merkel's method helps to complete two tasks simultaneously: to fill the State treasury and to reduce public expenditures.

If the government isn’t ready to take one of these measures fully, it can change the state program and take the following steps:

  • raise the age of retirement;
  • reduce the working hours;
  • reduce costs for the social benefits;
  • target the financial fraud and tax avoidance;
  • introduce the luxury tax;
  • privatize the public factories;
  • increase the value-added tax.

Critics of Austerity

The programs of austerity were implemented in the 1980s and the 2000s as part of the neoliberal doctrine and were largely criticized later. The debt crisis in Greece, Occupy movement, and anti-austerity protests in Spain have shown that these measures don’t always work. 

The main reasons for the critics were the reduction of the social programs and the budget expenditures for medicine and education. These measures have cut the vulnerable segments of the population off from access to health care and good education. Many people with mental health problems, alcohol and drug addiction, and orphan diseases couldn’t receive free medical care. Also, a huge number of students were forced to take out educational loans.

The policy of austerity was blamed for the reinforcement of inequality in society. In the conditions of minimal state support, the people with low income couldn’t receive qualitative products, services, and education. They have been trapped in the poverty trap: the rich get richer and the poor get poorer.

Such a situation caused mass debt growth and unemployment, and people started to protest. The protests were especially strong in Greece from 2007 to 2008. After this, the politicians and economists were forced to overview the austerity policy. They have seen that even if the austerity causes short-term cash flow, after this it prolongs economic recession. Unemployment and high taxes make people spend less money and, as a result, businesses suffer from decreasing sales and oversupply. The companies can’t pay the salary. They close up the shops and lay off the staff, and the crisis continues. 

The experts had concluded that the inequality and lack of support threaten economic growth, that’s why austerity can’t be a thing that works across the board. Such a measure should be implemented carefully and discreetly.

Does Austerity work

Austerity is a quite controversial question. On the one hand, the austerity measures help to economize the budget and lower the default risk. On the other hand, it reduces the state programs and provokes the growth of social strain. 

The answer is the following: the austerity police need strong government control to be successful and fruitful. It demands timing and monitoring of social sentiment. The government should know when to stop the austerity because it increases the risk of unemployment and households’ expenditures. Also, it is better to avoid the austerity measures during the time of recession because in such a moment the state should support the people. The uncontrollable tax hikes only make the taxpayers spend less and less, and eventually, businesses can’t sell the goods and stay afloat. Moreover, there are several countries where austerity has caused a debt crisis. 

The austerity works on a short distance in a time of economic stability. The reduction of expenditures will help to avoid the bubble and assure the investors that the government can fulfill its obligations. 

Subscribe to our newsletter and stay up to date with all the news!