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Austerity facts for kids

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Austerity measures (political-economics) are government actions that try to reduce government budget deficits. They do this by spending less, increasing tax, both, or some other clever ways.

Austerity measures are used by governments that find it difficult to pay their debts. The measures are meant to reduce the budget deficit by bringing government revenue closer to spending.

In most macroeconomic models, austerity policies generally increase unemployment as government spending falls. Decreased government spending reduces public and maybe private employment. Also, tax increases can reduce consumption by cutting household disposable income. Some say that reducing spending may result in a higher debt-to-GDP ratio because government expenditure itself is a part of GDP.

For example, after the Great Recession, austerity measures in many European countries were followed by increasing unemployment and debt-to-GDP ratios despite smaller budget deficits. When an economy is operating at or near capacity, higher short-term deficit spending (stimulus) can cause interest rates to rise. This results in a reduction in private investment. This then reduces economic growth. Where there is excess capacity, the stimulus can result in an increase in employment and output.

Related pages

  • Functional finance
  • Neoliberalism
  • Planned shrinkage
  • Trickle-down economics

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