4.5 - Austerity

Question 1

What is fiscal austerity?

Answer 1

Policy designed to reduce deficit + control/lower national debt

Question 2

What are the typical policies involved in austerity measures?

Answer 2

Cutting govt spending
Raising tax
Supply side policy (encourage growth)

Question 3

What are the arguments in favour of austerity?

Answer 3

In economy’s long run interest
Shrinking state - Private growth
Reduces debt interest burden
Improve investor/FDI confidence

Question 4

What are the arguments against austerity?

Answer 4

Can be self defeating
Damaging social consequences
Income inequality + high IR
Public sector pay freezes - efficiencies

Question 5

How can austerity be considered self defeating?

Answer 5

If deflation + unemployment are created
Depresses investment + employment
Harms tax revenues

Question 6

Why does austerity depend on the stage of the economic cycle?

Answer 6

Makes sense during upturn
Rational to run stronger budget finances before entering downturn/slowdown

Question 7

What can public sector austerity cuts consist of?

Answer 7

Public sector wage freezes
Limit welfare payments/entitlement
Privatise state assets
Reduce govt subsidies