Austerity is defined as a set of government regulated economic implemented to control public sector debt. Austerity measures are taken to reduce government spending (or higher taxes) in order to try and reduce government budget deficits – during a period of weak economic growth. Austerity is more likely to be used during a recession or period of very weak economic growth.
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Working of Austerity
Austerity are only taken into consideration when the gap between government receipts and government expenditures shrinks. A reduction in government spending doesn’t simply equate austerity.
There are three primary types of austerity measures:
1. First one is focused on revenue generation (higher taxes), and it often even includes more government spending. The primary goal is to stimulate growth with spending and get benefits through taxation. In this case the government may raise taxes to increase the revenue and then use the additional tax revenue to reduce its debt. The government can choose to increase either the rate of direct taxes – income tax or wealth tax or the rate of indirect taxes -consumption tax.
2. The second one is sometimes referred as the Angela Merkel model and focuses on raising taxes while cutting nonessential government functions.
3. The last one features lower taxes and lower government spending. This is the preferred method of free-market advocates. In this case the government may decrease its spending. The reduction in expenditure can be used to lower the government debt.
Advantages of Austerity Policies
The primary purpose of adopting austerity measures into a country is to decrease government debt. However, many economists believe that austerity policy is ineffective, as reductions in government expenditure include cuts in healthcare programs, welfare services, and other essential government-provided services. In addition, this also tend to affect low wage earners more than high wage earners. As the result the section of society that needs the most assistance during a period of economic instability is harmed the most by austerity-based policies.