The Debate on Austerity

The Debate on AusterityThe adoption of austerity post the financial crisis in 2010 by the UK government is heavily debated. This essay evaluates the arguments for and against this financial contraction deliberating on the applied and possible fiscal insurance measures and the limitations of monetary policy after the fiscal stimulus provided in 2008.When the housing bubbleburst and Lehman Brothers collapsed in 2008, the subprime mortg succession crisismagnified into a ball-shaped financial crisis. Governments had to rush in and savebanks. If not, the hail of public confidence in the banking system would fuddlemade the problem far more severe. Large fiscal stimulus packages were rolledout to moderate the blow. save for how long would a government be willing to takefurther debt for expansionary fiscal policy? They could affirm continued to join on public expense to compensate for the fall in private expenditurein accordance with the Keynesian theory. Or increase savings, let th e wage rate dangle and have the rent rise due to a price advantage in the long run (Hayek,2006). By 2010, United Kingdoms national debt reached 75.6% of its gross domestic product (Eurostat).Had bond yields increased due to falling market confidence, the fiscalsituation would have been worse off. It would imply that the risk associatedwith government bonds is higher and have damaging implications about thegovernments credibility, all raising the cost of public debt in the future. Thus,in the 2010 elections, the campaigns of both the Conservative and Labourparties suggested reducing the fiscal deficit. No one spoke in favour offurther stimulus and austerity was adopted.The UK government feareda Greek-style melt knock off. A countrified having borrowings in its own currency and afriendly central bank may not have to fear public debt as much. It could alwayskeep a control on vex rates or postpone repayment by issuing new bonds. However,then governor of the Bank of England, Mervyn K ing, appeared to favourausterity. It remains uncertain if he would have sanctioned further denary easing. Typically, central banks reduce interest rates tostimulate the economy in such conditions. Lower interest rates evokeconsumption which would have decreased due to lower fiscal expenditure. Thedrop in interest rates from 5.5% in 2008 to 0.5% generated 350 billion toinject into the economy (Giles, 2018). But with interest rates at an all-timelow of 0.5% since 2009, in that location wasnt much that could be done on the monetarypolicy front (Bank of England). The drop in interest rates from 5.5% in 2008 to0.5% generated 350 billion to inject into the economy. the Value Added Tax(VAT) was raised to 20% and public expenditure was cut to bring down the deficit(Finch, 20101). The combination of additional revenue and a lower deficitwould cut down the need for further debt and help service the existing.Austere disbursement decisions lowered the welfare expenditure. The employment lev el decreased because of lower government expenditure. As a bequeath, demand plunged and so did the gross domestic product. High hesitation had lowered the public confidence. The GDP result rate was insufficient to counter the shrinking in the economy caused by austerity. International Monetary Fund (2012) warned that the untaught might face permanent damage to its productive capacity if the same policies were continued. The governments tax revenues took a hit owing to lower output. This resulted in a higher debt to GDP ratio as the budgetary deficit grew. As real wages of public sector workers and local council budgets fell, homelessness and reliance on food banks rose. Social care for the elderly was negatively impacted and help from Red Cross was called in to shoulder the increased pressure on the NHS (Gillett, 2017). tick off Blyth (2013) noted that there was disparity in the impact of austerity across different levels of society. He pointed out that the consequences were f elt more severely by the big share of public service users who didnt have enough wealth to counter the cut in welfare using up. In theory, fallingdeficit would result in lower taxes in the future. This should increaseconsumer confidence in the economy. However, critiques of austerity blame thegovernment for the plummeting consumption levels. They believe the governmentshould have continued with quantitative easing when the private spending shrank.Wage rates fall with falling public expenditure. This gives the economy a costadvantage as compared to its competitors in the global markets. To benefit fromthis, it is necessary that foreign demand for the domestically produces goodsincreases. But many Eurozone were implementing austerity themselves and thus,there was no substantial increase in foreign demand for British goods.Moreover, countries like China had induced a fiscal stimulus in their economiesdespite not having been impacted as greatly by the crisis. Hence, there was alreadye nough supply in the market for any country to benefit from rising demand. There was perhaps not once cause to thedeclining consumer spending in the UK. While UKs own fiscal policy changed in2010, the economic environment globally was also impacted by several countriesintroducing policy changes. The commodity prices changed and the FederalReserve was keeping global rates low, all of which had some impact on the UKeconomy (Buttonwood, 2015). In spite of the falling consumption, there was aneed to reduce government expenditure to reduce the deficit. Further fiscalstimulus, after what was introduced during the financial crisis, would have ledto a sharp increase in government debt. Such a high debt level would makefiscal policy unsustainable and repayment challenging (Emmerson, Keynes and Tetlow,2013).In terms of real goodspending, the cut wasnt as much from 2010 to 2015. Britains general totaldisbursements as a percentage of national income were the third highest amongstthe G6 nations between 2007 to 2009 and remained so in 2013 (OECD, 2014).Annualised average real increase in spending on social security and health roseand real spending on working age and pensioner benefits grew between 2010 and2013 (Keynes and Tetlow, 2014 16-17). The economys recoveryin 2013-2014 sparked another debate. Had austerity worked or was it the resultof policy alteration in 2012? Klein (2015) asserted the growth was a result of areversal from austerity. Smith (2015) refuted, stating that the government wasstill austere in spending decisions with the fiscal tightening being largerthan 3% of GDP. Krugman (2015), however, maintained that abandoning furtherfiscal cuts after two years of austerity led to the economic growth.Whether the economywould have been in a better seat without austerity will remain unknown.What can be concluded though is that austerity was not an economic necessity then.But with UKs ageing population, welfare expenditure will only increase in thefuture. Such a welfa re cap will become necessary for better policy decisions asthe pressure on NHS and public services escalates. Continued quantitativeeasing in 2010 would have made public finances more unsustainable and fiscalausterity in future more drastic. Spending cuts or higher taxes, no matterwhen, will always be met with heavy criticism. Hence, a developed country withageing population could aim at increasing sources of income, reducing incomeinequalities and reducing the dependence on welfare expenditure.BibliographyBankof England online Available from http//www.bankofengland.co.uk/boeapps/iadb/Repo.asp(Accessed 24 April 2018)Blyth,M. The Austerity Delusion. irrelevantAffairs online Available from https//www.foreignaffairs.com/articles/2013-04-03/austerity-delusion(Accessed 15 April 2018)Buttonwood(2015) What is austerity?. TheEconomist online Available from https//www.economist.com/blogs/buttonwood/2015/05/fiscal-policy(Accessed 15 April 2018)Emmerson,C. & Keynes, S. & Tetlow, G. (2013) Pub licfinances outlook and risks. The IFS Green Budget February 2013. capital of the United KingdomInstitute for Fiscal Studies. Available from http//www.ifs.org.uk/budgets/gb2013/GB3013_Ch5.pdfEurostat online Available from http//ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=sdg_17_40&plugin=1 (Accessed 24 April 2018) Finch,J. (2010) Budget 2010 VAT rise to 20%could cause double-dip recession. The Guardian online Available from https//www.theguardian.com/uk/2010/jun/22/vat-rise-recession-fears(Accessed 15 April 2018)Giles,C. (2018) Bank of England defendsresponse to financial crisis after criticism. Financial Times onlineAvailable from https//www.ft.com/content/4231c5a0-3caf-11e8-b9f9-de94fa33a81e(Accessed 24 April 2018).Gillett,F. (2017) NHS calls in Red Crossvolunteers and staff amid humanitarian crisis. Evening Standard onlineAvailable from https//www.standard.co.uk/news/uk/nhs-calls-in-red-cross-volunteers-and-staff-amid-humanitarian-crisis-a3434901.html(Ac cessed 15 April 2018)Hayek,F. A. (2006) The Paradox of Saving. onlineAvailable form https//mises.org/library/paradox-saving(Accessed 15 April 2018)InternationalMonetary Fund (2012) United Kingdom Staff Report for the 2012 Article IV Consultation. online Available fromhttps//www.imf.org/en/Publications/CR/Issues/2016/12/31/United-Kingdom-Staff-Report-for-the-2012-Article-IV-Consultation-26083(Accessed 15 April 2018) Keynes,S. & Tetlow, G. (2014) Survey ofpublic spending in the UK. London Institute for Fiscal Studies. Availablefrom https//www.ifs.org.uk/publications/1791Klein,M. W. (2015) Eurozone Recovery andLessons About Austerity. The Wall Street Journal online Available from https//www.blogs.wsj.com/washwire/2015/05/16/eurozone-recovery-and-lessons-about-austerity/(Accessed 15 April 2018)Krugman, P. (2015) The case for cuts was a lie. Why does Britain still believe it? The austerity delusion. The Guardian online Available from https//www.theguardian.com/business/ng-interactive/201 5/apr/29/the-austerity-delusion (Accessed 15 April 2018) TheOrganisation for stinting Co-operation (2014) Economic Outlook No 95 May 2014 OECD Annual Projections. onlineAvailable from https//stats.oecd.org/Index.aspx?DataSetCode=EO95_INTERNET(Accessed on 24 April 2018)Smith,D. (2015) The Myth of AbandonedAusterity. online Available from http//www.economicsuk.com/blog/002094.html(Accessed 15 April 2018)