Monday, 17 September 2012

CASE 423 - Austerity

In economics, austerity refers to a policy of deficit-cutting by lowering spending via a reduction in the amount of benefits and public services provided by the democratic societies and governments in most of the worlds countries. Austerity policies are often used by governments to try to reduce their deficit spending and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.

Supporters of austerity predict that under expansionary fiscal contraction (EFC), a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion.

Greece Protest Violence Flares In Athens Amid Mass Strike against austerity

Critics argue that, in periods of recession and high unemployment, austerity policies are counter-productive, because: a) reduced government spending can increase unemployment, which increases safety net spending while reducing tax revenue; b) reduced government spending reduces GDP, which means the debt to GDP ratio examined by creditors and rating agencies does not improve; and c) short-term government spending financed by deficits supports economic growth when consumers and businesses are unwilling or unable to do so.

A typical goal of austerity is to reduce the annual budget deficit without sacrificing growth, but takes money off the people and their services and food out of there mouths to make sure the minimum payments are made to the banks that the governments owe. Over time, this may reduce the overall debt burden, often measured as the ratio of public debt to GDP. During the European sovereign-debt crisis, many countries embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.

However, with the exception of Germany, each of these countries had public debt to GDP ratios that increased (worsened) from 2010 to 2011, as indicated in the chart at right. Greece's public debt to GDP ratio increased from 143% in 2010 to 165% in 2011. This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt to GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries together was 70.1% in 2008, 79.9% in 2009, 85.3% in 2010, and 87.2% in 2011. Unemployment is another variable that might be considered in evaluating austerity measures. According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined.

Discretionary spending, mandatory spending, and revenue increases over nine-year intervals Another historical example of austerity was in the United States, which balanced its budget from 1998 to 2001. The basic strategy was to limit the rate of growth in defense and non-defense discretionary spending (which funds the major cabinet departments and agencies) during most of the 1990's, while growing revenues along with the economy. Comparing 1990 vs. 1999, defense and non-defense discretionary spending grew by a total of 14%, while revenues grew 77%. Public debt to GDP declined from 42.1% in 1990 to 39.4% by 1999, although it rose during the interim slightly. In contrast, from 2000–2009, discretionary spending grew by a total of 101% while revenues grew only 4%. Public debt to GDP increased from 34.7% in 2000 to 53.5% in 2009. Revenue grew nearly 25% when comparing 2000 to the pre-crisis peak in 2007, still considerably less than the prior decade

Examples of Austerity

Argentina, 1952,2012

Cuba, 1991

Czech Republic, 2010

Germany, 2011

Greece, 2010–2012

Ireland, 2010-2012

Israel, 1949–1959

Italy, 2010-2012

Japan, 2010-2012

Latvia, 2009

Mexico, 1985

Netherlands, 1982–1990, 2003–2006, 2011

Canada, 1994

Nicaragua, 1997

Palestinian Authority, 2006

Romania, 2010

Portugal, 2010–2011

Puerto Rico, 2009–2013

Spain, 1979,[49] 2010, 2012

United Kingdom, during and after the two World Wars, 2011–2014

United States, 1921, 1946

Naples, Italy 2012

The Science and Ethics of Austerity: Lessons from the US and Europe

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