N ATHAN E MOIKE
Is austerity justified?
Austerity is a set of contractionary fiscal policies with the aim of eradicating the government’s budget deficit. Through reducing government spending and increasing tax revenue received, the government is able to balance its books and head towards either equilibrium or a budget surplus. However, such measures have become the target of some criticism, especially from those whose lifestyles and standard of living are affected by changes to taxation and government spending. It has been claimed that these implementations are ‘unfair’ and that governments do not make just decisions and instead choose to appease those who are potential voters. On the other hand, it has been seen as a desperate yet necessary measure to undertake in order to guarantee the economic safety of the future. Following the Conservative government’s ascension to power in 2010, the budget deficit was at £149 billion (11% of GDP) and George Osborne announced a set of policies which were to be introduced with the aim of reaching a balanced budget by 2015-16. These included an increase in VAT from 17.5% to 20% and various spending cuts which were scheduled to amount to £6 billion per annum. To what extent, though, is austerity justified in sacrificing the economic needs of the people of today for those of the people of tomorrow? The most evident argument for austerity is that reaching a balanced budget, or even equilibrium, would result in larger funds available to the government which enable it to (if necessary in the future) spend its way out of a recession. For example, in regard to the most recent recession in 2008, the government not only used monetary policy instruments but also, from 2010, spent money in order to boost aggregate demand in the economy. These measures resulted in the economy recovering from the recession with positive economic growth for the first time in years. Furthermore, the decision not to cut budget deficits means that one runs the risk of higher bond yields. These high yield bonds carry lower credit ratings meaning that the government is viewed as more likely to default on their loans. Therefore, lenders would receive a higher yield due to the increased risk carried on the loans. High yield bonds also increase the cost of financing debt incurred by the government so future generations will have to unfairly bear the consequences of the mistakes made by governments past. The more high risk bonds also cause a rise in interest rates, reducing the likeliness of private firm investment due to the increased cost of borrowing money and, therefore, hindering long term economic growth. In order to prevent such negative repercussions, it is believed to be imperative to do whatever is necessary to reduce a budget deficit. This may, unfortunately, mean displeasing part of the population by cutting government spending and raising taxes. On the other hand, austerity measures undertaken in Spain, Greece and Ireland have failed to reduce high bond yields and, in some cases, austerity has actually been the cause of the higher bond yields. This is because austerity leads to lower growth resulting in a shrinking economy which is viewed negatively by the world market. The global market is less likely to lend to this economy as it is harder to see how a government can repay loans in their current economic situation. In addition, during a recession households and firms usually tend to cut down on their spending and attempt to pay off their debts. This leads to a fall in the level of aggregate demand in the economy. If a government also decides to cut its spending, aggregate demand will fall even further which is why, at times, it is seen as self-defeating. Thus, Keynesian economists argue for governments to increase spending. A prime example of this was in Greece in 2010/11 where civil servants’ wages were cut by 60%, pensions of more than €1,200 a month were cut by 20%, and taxes (including VAT) rose significantly. This resulted in a fall of 6% in GDP which ironically reduced tax revenues and increased their debt therefore completely eradicating the vindication for the use of austerity. Another cost of austerity is not economical; it is instead the impact it has on the welfare of the people living in such a country. Those who
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