Fiscal Policy: British Austerity

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This article takes a critical look at Great Britain’s austerity policy, which went into effect in 2014, and discusses the policy’s effectiveness in achieving its objective. The author explains that austerity policy attempts to reduce the structural deficit of the government. In the policy’s first year, Great Britain’s structural deficit declined from 11 percent of the country’s GDP to 9.3 percent. Many people interpreted this result as proof of the policy’s success, even though the government’s spending still exceeded its income in the form of taxes that year.

However, as the author goes on to explain, it may not be correct to attribute the reduction in the federal deficit to austerity. This is due to the fact that the economy is cyclical, and the national deficit is responsive to cyclical changes in economic conditions. The author writes that for every “action” the economy exerts on society by expanding and contracting, “automatic stabilizers” provide an equal and opposite reaction. For example, when the economy grows, the deficit declines, irrespective of the government’s fiscal policy stance. Conversely, when overall demand falls correspondingly with due to cuts in private sector spending during a recession, increased government spending tends to resupply demand.

Austerity policy tends to ignore the economy’s cyclical nature and tries to reduce public expenditures by imposing spending cuts regardless of how strong the economy is. This can be counterproductive and may actually increase the overall deficit. For example, if the government imposes austerity measures when the economy is weak, it may end up lowering its tax revenue while spending even more on benefits.

It is difficult to evaluate the effectiveness of austerity policy because it is difficult to know how much of the deficit is structural – in other words, the extent to which it is invariant with changing economic conditions – and how much of the deficit is cyclical – the extent to which it grows when the economy contracts and shrinks when the economy expands. Thus, it may be that the deficit shrunk 1.7 percent over the 2014 fiscal year, not because of austerity measures that went into place that year, but because it was simply fluctuating in tandem with an economy undergoing a period of expansion.

The author does not explicitly state his or her opinion on whether austerity policy was actually responsible for the reduction in the structural deficit in 2014. However, the article takes a skeptical tone and questions whether austerity measures are actually preferable to other fiscal techniques to reduce the deficit. In this, I agree with the author and share his (or her) skepticism. Governments can achieve reductions in their structural deficit through means other than tighter spending controls on departmental budgets. Raising taxes could also reduce the deficit. Since spending cuts impact the general public by reducing their access to government services and benefits, it should not be the government’s first resort in achieving its fiscal objectives. Austerity-driven budget cuts often take money away from departments that really need it and that perform essential work, like the National Health Service in Great Britain which provides healthcare for British citizens. Raising taxes would help reduce the deficit without hurting government departments.

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