Whenever an economic crisis rears its head, most politicians take the easy way out and decide to reduce costs by cutting back on a multitude of services and investments. But such austerity measures seldom work simply because they never really affect the lifestyles, comfort and standards of those making the cuts; they aren’t the ones feeling the pain. What austerity measures do is reduce economic growth, discourage investment in the workforce, widen social inequality, increase the gap between ‘them’ and ‘us’, and stifle enthusiasm thereby making the situation much, much worse on many levels for most people.
Timing is everything. When an economy is struggling to get out of a recession, lowering government spending, laying off workers and cutting investments reduces economic growth, cuts productivity and increases unemployment. And by the way, raising taxes takes money out of consumers’ pockets, giving them less to spend. The best time for austerity measures is when the economy is booming to keep growth down to a manageable rate of around three percent, and avoid a bubble. The less you have, the harder it is to save; the more you have the easier it is.
And another point: If government is cutting costs, why does it need to increase taxes? Think about it!
Austerity measures invariably comprise reductions in government spending and increases in tax revenues. These harsh steps are intended to lower deficits and avoid debt crises. Governments are unlikely to implement them unless bond markets or other lenders compel them to because people suffer limited unemployment benefits, raised retirement ages, reduced health care benefits, lower wages, benefits and hours for government employees, and slashes in programmes for the poor and needy.
Countries use austerity measures when governments and creditors become concerned that the country will default on its debt, which usually occurs when the debt-to-GDP ratio gets above 90 percent meaning that the debt is almost as much as the economy produces in a year and creditors start demanding higher interest rates to compensate them for the higher risk.
In turn, higher interest rates mean it costs the country more to refinance its debt until the point when it can’t afford to keep rolling over debts and it turns to other countries for loans, or to the International Monetary Fund. In return for bailouts, new lenders require austerity measures.
Austerity measures are supposed to restore confidence in the way a government manages its budget. The proposed reforms are supposed to create more efficiency in order to support a stronger private sector. Unfortunately the message seldom filters down to those who suffer most. When regular people who are struggling to make ends meet are told that they must make even greater sacrifices for the good of the economy they are sure to cast resentful glances at shiny new government vehicles, lavish international conferences, state banquets and ministerial luggage festooned with airline baggage tags from the world over.