Do Austerity Measures Really Work?

A 23% increase in the sales tax and wage cut up to 15%! This is in Ireland! When the government sees no other method to hold the country stable then they adopt austerity measures, or it can be said that austerity measure adoption shows that the government has failed with its administration and strategies.

Ireland has gone through 5 austerity budgets since 2008 to slash the spending and to increase the taxes and the experts say that this will go till 2015. Ireland has cut down the number of civil servant vacancies, high taxes are imposed on income, automobiles, fuel and homes, and the unemployment rate is 15%.

These measures were introduced in Greece in 2010 as a precondition for IMF-EU 110bn euro bailout. A second bailout package of 130 bn euros was given in 2012. 2010-2012 Greek riots against new measures resulted in the death of 5 people. The spending cuts were equal to 1.5% of the output, but these new methods have not resulted in the goal which they were adopted for and the main reason is the instability of the ruling party.

In 2011, an amount of 78 bn euros was bailed out to Portugal by IMF and other European countries, same year austerity measures were passed in the country. They included a 5% pay cut to the top earners from the public sector, a 1% rise in the VAT and an income cut for high earners. 14.8% unemployment is reported in 2012 and military budget is also being slashed.

The Spanish Government took a historical movement of cutting 27bn euros from the state budget in 2012.The first ever austerity budget was passed in 2011, to meet the deficit target of 5.3% of the GDP, the measures adopted are 5% cut in civil servants pay, 28% hike in tobacco taxes, 30% cut in infrastructure taxes, a freeze in public worker salaries and 16.9% reduction in departmental budgets.

The UK adopted new measures in 2011 by the Conservative-Liberal Democrat coalition government. The number of job cuts will come up to 490,000, 19% budget cuts for all Whitehall departments and the retirement age will rise to 66 from 65 by 2020. The budget deficit is 10% of the GDP and unemployment is around 8.4% that is 2.67mm.

A 5 % cut in the top rate of tax is mentioned in the 2012 budget. Personal income tax allowance which the pensioners receive and the child benefits were reduced. Whereas tobacco taxes was increased.

The real question is whether the austerity measure can improve the country’s economy. According to the GDP equation, GDP = C+I+G+(X-M), they will help in reducing the G, which is Government spending.

When G is Government spending, C stands for private consumption, I for Gross Investment, X and Y are Exports and Imports respectively.

Austerity measures will reduce the G, which in turn will reduce I. Government spending and not making revenue are the reasons for government debt. Ever since the recession, Greece’s economy has come down more and more, despite implementing further restrictions, The economy contracted by 2.3% in 2009, 3.5% in 2010, 6.9% in 2011, and 6.0% in 2012. Spain also with its austerity measures got a 7% decrease in government spending; they have 24% of unemployment rate with the GDP coming down to 5.1%

The impacts of austerity are long term and are detrimental to social and economic situations. By applying these measures, the EU is just targeting on short-term fiscal deficits and debt to GDP ratio. Austerity measures are nothing but transferring crisis from one period to another.

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