The Need for Fiscal Austerity

The idea of fiscal austerity brings about discomforting and delicate thoughts to every citizen of the world’s mind; these agitating thoughts include high cost of living, unemployment, and adverse hardship, amongst others.

During the past few years of economic difficulty, many politicians, economists and financial experts, including George Osborne, the current Chancellor of the Exchequer in the UK have mentioned the need to change fiscal policies. He claimed the proper handling and management of these policies, was the only way of recovering from the long backdrop of economic growth – recession. (Reuters UK, 2013) He believed the current spending rate of the UK government, without solid and progressive means of financing it but borrowing, was going to deepen the economic crises and pile up a huge debt for future generations to come, if an immediate step was not taken to halt and correct it.

This begs the need to answer the question, “What is fiscal austerity?”

Fiscal Austerity, according to the Financial Times lexicon, in its simplest term refers to “governments’ policies on how to generate revenue or money, through increased taxation, whilst reducing expenditure and borrowing in order to minimize deficit”. In essence, through fiscal austerity, governments make use of economic tools such as taxation, subsidisation, and the management of its own expenditure to influence and improve unemployment rates, inflation, interest rate and the individual well being of citizens in the economy.

In an attempt to deal with unemployment by increasing the money supply in an economy, a government might decide to raise its spending or capital investment on the building of highways, housing, and uplifting general infrastructures in a country alth...

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... is no guarantee that people whom these cuts affect will spend such monies in the economy because they might decide to save it instead.

In addition, cuts to welfare and benefits could lead to increased pressure on local banks in the form of financial assistance. This could lead to a shoot up in interest rates and low private sector confidence since the incentive to borrow i.e. low interest rates will not be available. This could also lead to a drop in GDP, which worsens the recovery from the recession.

Finally, it is not all negative in relation to these cuts. The long-term effect could flush out fraudulent claimants from the system and increase the chances of genuine claimants who can prove their circumstances. Furthermore, it could also lead to an increase in the general workforce on which the government relies for revenue through taxes for economic expansion.