May 19, 2013
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Description
In economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies can include spending cuts, tax increases, or a mixture of the two. Austerity policies may be attempts to demonstrate governments' liquidity to their creditors and credit rating agencies by bringing fiscal income closer to expenditure.
In macroeconomics, reducing government spending generally increases unemployment. This increases safety net spending and reduces tax revenues, to some extent. Government spending contributes to gross domestic product, so the debt-to-GDP ratio which signifies liquidity may not immediately improve. Short-term deficit spending particularly contributes to GDP growth when consumers and businesses are unwilling or unable to spend. Under the controversial theory of expansionary fiscal contraction, a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion.
Initial austerity results in Europe have been very negative, with unemployment rising to record levels and debt to GDP ratios rising, despite reductions in budget deficits relative to GDP. Eurostat reported that Euro area unemployment reached record levels in March 2013 at 12.1%, up from up from 11.0% in March 2012 and 10.3% in March 2011; and 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. The U.S. Congressional Budget Office estimated in August 2012 that if the U.S. implemented moderate austerity measures, the unemployment rate would rise by over 1% and economic growth would be significantly reduced in 2013. The U.S. partially avoided the "fiscal cliff" through the American Taxpayer Relief Act of 2012. U.S. unemployment has fallen steadily from a peak of 10% in early 2010 to 7.6% by March 2013.
(via Freebase)
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