In case of high budget deficits, government always attempts to find some way to reduce it, Austerity happens to be one of those ways. Austerity involves policies like higher taxes and cut in government spending. However, austerity policies seem to be unpopular because they tend to reduce the various benefits given by the government to the public in form of subsidies.
As the government brings a cut in their spending, it results in a fall in aggregate spending. Reduced expenditures by the government on subsidies to help people induces the general public to not to spend much on things i.e, save more and thus inviting a fall in aggregate demand. Lower government job opportunities also encourage unemployment in the economy. Moreover, higher taxes imposed by the government also contribute to the falling aggregate demand.
Austerity policies slow down the economic growth of a country and may even push the economy into recession. Lower economic growth revokes lower tax revenues to the government. But still the possibilities of reduction in budget deficits are there even if it’s small.
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Agreed to all the points mentioned above. In addition to it, any subsidy or temporary decrease in taxes or temporary increase in spending leads to increase in taxes or decrease in spending in the near future. This is where Austerity comes into picture.
Very well written…knew the stuff but didn’t knew about the specific term
Good effort..!
Good effort!
Nice article
Nice effort.. short but good..
I had no idea 😀 about this topic 😀
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Even the nature is in an austere mood sometimes but with time things get better 🙂
Nice article