Austerity is an economic theory that champions cutting government spending, increasing some taxes, privatisation, reconfiguring public services, and freezing labour costs. These measures are aimed at saving governments money, and empowering the private sector to generate economic growth.
However, austerity theory is not supported by any leading economists. The two most cited papers that make the case for austerity (Alesina and Ardagna, 2009; Reinhard and Rogoff, 2010) have both been found to have had erroneous evidence bases, and have been widely discredited.
Moreover, austerity theory more broadly has been critiqued by many economists. Among these, John Maynard Keynes argued that the boom and not the bust is the best time to implement austerity. In a recession, on the other hand, it is desirable to increase government spending because it has the potential to create more jobs.
Compiled by Jonathan Drew and Rik Sutherland from the St Vincent de Paul Society National Council office.
Source: Dexter Whitfield, http://www.dunstan.org.au/projects/austerity/)
- Does austerity work to reduce debt?
In practice, austerity has not reduced debt. On the contrary, austerity has increased debt substantially.
According the International Monetary Fund (IMF)’s Fiscal Monitor, the debt to GDP ratio of governments has seen an increase more or less proportionate to the degree with which austerity measures were implemented.
For example, from 2011-2013, the years that austerity was the core policy, debt significantly grew in Spain, France, Ireland, Portugal, Italy and Greece, the UK and the US. Ireland’s debt-to-GDP ratio increased from 24.8% in 2007 to 125.1% in 2013, Portugal’s increased from 60.0% in 2006 to 127.2% in 2013 and Greece’s grew from 106% to in 2007 to 160.5% in 2013.
There have been very recent claims that the US economy is adding jobs, health care costs are declining and the deficit is shrinking. However, this observation can be seen as a small temporary aberration in deficits, which will most likely be followed by higher deficits in the near future (according to all fiscal authorities).
The argument that austerity reduces debt is theoretically implausible, and is not borne out by the statistics.
- What kinds of measures do governments implement?
Austerity policies predominantly involve welfare erosion (reducing social support for individuals) and fiscal consolidation (minimising deficits while limiting the buildup of more debt).
After the global financial crisis, pensioners became a target of government spending cuts. One austerian measure was a pension levy introduced in Ireland, amounting to 7.5% of pay, and the minimum retirement age was raised from 65 to 66. These government spending cuts are a major way of achieving the goals of austerity. However, the income of society’s most disadvantaged and vulnerable (such as pensioners) is often sacrificed in order to achieve this end.
For a long time, public sectors have retained employment security and benefits while private sector benefits have been whittled away. However, after the financial crisis public sector jobs also experienced an erosion of these privileges. Public sector job cuts in the US, the UK and Spain amount to 2.2 million together. Hence, people from almost all income levels are exposed to loss as a result of austerity.
Most shockingly, in the US, a $200 billion subsidy was given to sovereign creditors — the richest 5% of people in the country who hold 70% of all financial wealth — from taxpayers’ money. These types of policies, where subsidies go to big business or to the rich from the pockets of average citizens, are common under austerity.
Most austerity measures are aimed at cutting welfare, public spending and public services. Some, on the other hand, have seen money being given by government to big business or the most wealthy individuals.
- Is this happening in Australia?
The 2014-15 Australian Federal Budget contains many measures that could be characterised as austerian.
As an example, the Budget proposes significant changes to the Old Age Pension as the age of pension eligibility is gradually raised from 67 to 70 over three years. Similarly, there are proposals to stop indexation of income support payments, meaning that the real value of these benefits will decrease over time. Certain supplements are also being removed altogether, and there is talk of moving young unemployed people from NewStart to the much lower-paying Youth Allowance (designed as a study allowance). These spending cuts are indicative of austerity policy.
Read more information about the St Vincent de Paul Society's response to the 2014 Budget.
- How are the incomes of the poorest citizens affected?
In austerity-driven economies, the incomes of the poorest citizens have become the collateral of the recession. Their rights to benefits, living standards and employment opportunities risk being diminished to aid the short-term repayment of the country’s debt.
Overseas, austerity has been seen to bring about an increase in casual labour, which comes with job insecurity and loss of employment benefits. Employing more casual workers makes it easier for employers to stop giving them work if they want to get rid of them to reduce expenditure. This makes it harder than ever for people who only have access to casual jobs to sustain a liveable income, considering their need to wait (maybe months) before they can secure welfare benefits once their casual employment ceases to provide an income.
In addition to this casualization of the workforce, since the implementation of austerity in debtor nations, unemployment has climbed: in Greece, as high as 26.8% — the European average was 11%. Furthermore, 5.5 million young people under 25 are now unemployed in the European Union. This has a crippling effect on the poorest citizens in a country. Of particular concern is the income security of young people where austerity is the core policy. They may be forced to live with their parents for an extended period of time, placing a burden on their families. For many, living with family is not an option, and the consequences of unemployment are even more dire.
While unemployment climbs, welfare benefits should help to safeguard against inequality. Where welfare benefits are strong, inequality is reduced and there are lower rates of financial disadvantage. However, where austerity has become the core policy, there is a rise in income inequality, in part because welfare is a frequent target of cost-cutting in austerity-driven economies.This is especially the case with the 2014-15 Budget in Australia (see above).
Austerity measures negatively impact the poorest in society, but reducing opportunities for paid work, and by directly cutting income support payments.
- How do austerity policies affect the health of the most disadvantaged?
Austerity has had a negative impact on health systems.
Government spending cuts to health have entailed the closure of facilities and programs, an increase in a vast range of patient charges and longer waiting times. Health is not receiving enough government spending under austerity measures. This is a strange approach to take, because public spending to health, along with education, has been found to have the highest fiscal multipliers (benefits over the mid- to long-term).
Since austerity measures were introduced, there has been an increase in suicide rates in Europe and the US, as well as infant mortality rates in Greece post GFC. Further, stillbirths have increased and the amount of HIV infections between drug users has increased (a consequence of major reductions in funding needle exchange programs). In this way, public spending cuts to health and austerity generally can be seen to have produced bad results in health. Exchanging public debt for an increase in HIV infections would not be a trade many people would choose to make. Moreover, many of these cuts will have long-lasting social and financial consequences.
As an example, in 2012 Spain switched from a universal health system to an employment-based system. This means that those who are without employment receive a very different level of care to those in employment. This is indicative of many austerian policies: those who cannot afford it are hit the hardest, while those at the top remain unscathed.
Examples like the proposed $7 GP co-payment in Australia, and cuts to public education campaigns around preventative health, show how austerity policies designed to save money today will end up costing us all socially and economically in the future.
- How is housing impacted by austerity?
Issues in housing were a major contributor to the global financial crisis. However, austerity measures implemented since 2008 have not resolved the issues.
In Ireland, a quarter of borrowers are paying over 60% of their income in mortgage repayments. This is double the level of payments that would be considered to make housing “affordable”, and significantly impacts people’s ability to purchase the other goods necessary for a decent standard of living.
There has also been a peak in defaults and foreclosures since the financial crisis. The rate of US home foreclosures soared to over 200,000 per month in 2009. More recently, there were 801,359 properties with default notices, scheduled auctions and bank repossessions in the US in the first half of 2013. That is a remarkably high number of people who must experience the distress of losing their home.
In many austerity-driven economies, a considerable percentage of mortgages are in negative equity (where the house’s market value falls below the outstanding amount on the mortgage). In Ireland this is the case for 31% of mortgages, in Spain it is 24% , in the US 21.5%, and 10% in the UK. This condition will set homeowners back years with the repayments on their mortgages.
Austerity measures on housing, including the lack of a government spending on homelessness, and the stopping of the National Rental Affordability Scheme, will see more and more people in Australia losing their homes and becoming homeless.
- How do austerity policies affect business?
Austerity policies not only hurt individuals, they are detrimental to business and public confidence as well.
Contrary to Alesina and Ardagna’s claim that austerity policy would increase confidence in the private sector, between 2008 and 2012, the business investment rate fell from above 20% to 19.7% in the Euro area. Not only does austerity policy inflict financial hardship on people experiencing disadvantage, but it seems to impede businesses as well.
Between 2010 and 2011, when austerity policy was well underway in its effort to reduce debt and ameliorate economies in Europe, the percentage of business insolvencies (companies unable to meet their financial obligations) increased. In the UK this percentage rose by 6,3%, and in Greece by 27.6%. This actually occurred after the global financial crisis, which means that much of the increase can be linked to austerity policies.
The Euro area growth rate for GDP reached 1% in 2010 but has remained roughly above or below zero between 2011 and 2013. Therefore, the GDP growth rate can be seen to be in or near a state of stagnation during the years in which austerity was the core policy.
This does not inspire hope or confidence that austerity is the best possible policy for leading debtor nations out of deficit. The performance of austerity is poor.
Another consequence in reducing public spending is that it has led to a reduction in capital spending. In fact, the global volume of project finance lending fell from $159 billion in 2011 to $99 billion in 2012. What these figures who is the negative impact that austerity measures have on business.
Austerity policies are bad for business, both directly and indirectly. No-one benefits from austerity.
Austerity is ineffective as a means of reducing debt and promoting growth, and has severely negative consequences on citizens experiencing the most vulnerability.
Instead of austerity policies, experts have suggested a range of alternative economic models to help boost economies through periods of recession. These primarily involve directly stimulating, rather than cutting, parts of the economy, and empowering low-moderate income earners to increase their participation, instead of removing what little they have.