Austerity Policy and Global Recession Research Assignment (Essay Sample)

AUSTERITY POLICY AND GLOBAL RECESSION
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Austerity Policy and Global Recession
The ongoing global recession is a period of decline in the general economy which is being observed in various world markets and began towards the end of first decade in the current 21st century. There have been debates across nations on the actual scale of the great recession, and whether it has ended or not. In fact, it has been termed by the IMF as the worst global recession observed after World War II. The National Bureau of Economic Research claims that the great recession started in December 2007, and it is attributed to excess levels of debt (Lin 2015). An austerity policy involves various measures carried out to reduce government budget deficits. Economists term austerity as the reduction of government’s structural deficit without taking into consideration the effects posed by the economic cycle. The current global recession can be credited to abnormal levels of debt, thereby implying that countries ought to settle for austerity as their preferred policy in the present scenario. The automatic economy stabilizers mean that the government deficits rise and fall as the economy expands and contracts. During economic growth, revenues obtained from taxation increase and the spending on various unemployment benefits fall. In essence, this means that cyclical deficit will fall (or surplus will increase) even if the government does not do anything to change the policy (Janan 2012). Tax increments, cuts on spending, or a combination of both are some of the policies that are usually classified under austerity measures include. As such, they may be carried out to show the fiscal discipline by the government to credit rating agencies and creditors by bringing expenditures closer to revenues. Research shows that austerity policy is a very suitable measure that can be adopted by various countries in the world to cope with the current global recession (Janan 2012). Despite the fact that a government is likely to impose an austerity policy and still end up spending significantly more than it receives from taxes, the austerity program still remains favorable according to various economists (Schumpeter 2008). A good example is that of the British coalition government which was experiencing a GDP’s deficit of 9.3% one year after imposing austerity; a relatively high figure when lined up against peacetime standards. However, the value was less than the GDP’s value which was 11% in the previous year and thus it could still be termed as austerity (Stuckler & ‎ Basu 2013). Since the onset of the ongoing global recession, the stimulus versus austerity debate has been prominent. Austerity policies advocates have been urging governments to ease taxes and various regulations, retrench public spending and adopt beneficial measures that are capable of restoring business confidence encourage investment, entrepreneurship and economic revitalization. The stimulus measures urge governments to increase public spending to create employment, maintain citizens’ income, and stimulate citizen’s consumption which will lead to an increase in the demand for goods and services, thereby fostering growth and prosperity (Lin 2015). Consequently, various countries have adopted either the austerity measures or the stimulus measures. Hence, economists have taken very clear positions when it comes to austerity and stimulus policies. Besides, many neoliberal scholars and some economists are of the opinion that countries should embrace austerity policies (Atkinson 2014). Specifically, few economists such as Schumpeter (2008) assert that recessions ought to be allowed to follow a natural course. When the country implements austerity policies, it signals entrepreneurs and investors that it is serious and ready to promote recovery. The move also shows that the country wants to live within its means by raising taxes to meet governmental deficits. In this atmosphere, entrepreneurs can risk to invest in the resurgent economy. Reserve banks have also been found to augment the move by easing the supply of money and offering ready investment credit. The boosted confidence leads to new investments, thereby creating jobs and fostering the so called expansionary austerity (Chaston 2013). Furthermore, neoliberal scholars and economists disagree with Keynesian, who claims that austerity is deflationary, and insist that austerity promotes positive growth. Research by Atkinson (2014) showed that various countries which embraced austerity measures were restored to a state of normal economic functioning. Additionally, Reinhart and Rogoff (2010) showed that deficit spending exacerbates the recession problem and also impedes economic growth. Besides, Schumpeter supports the neoliberal or neoclassical position and claims that the economy’s long term health is dependent on a dynamic economic growth process which ought to be characterized by a creative destruction followed by renewal and regeneration (Reinhart & Rogoff 2010). Thus, deficit changes that have been cyclically adjusted are attributed to the actions of policymakers in different countries and not the business cycles. To illustrate further, table 1.0 below shows the values of recent government deficits which have been adjusted cyclically through austerity as a percentage of the country’s GDP.
Table 1.0 Recent Government Deficit Reductions in several countries

Latest Deficit Peaks

Approximated deficits in 2013

Average Annual Reductions

Greece

19.1(2009)

-0.2 (surplus)

4.8

Portugal

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