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Austerity Around the World TodayFrom 2008 OnwardBrittany Wightman, Holly Farmer, & Sarah Schmitz ECLS 353
What is austerity?In an economic context, austerity refers to governmental policies that are meant to decrease budget deficits during difficult economic conditions.
Austerity in the US
Sept 2008: The economic crashMost acknowledge the market crash of September 2008 as the beginning of today’s adverse economic conditions. This period is known as the Great Recession, and represents the worst economic downturn in the US since the Great Depression of the 1930s.
In the United States, the government responded to the crash by passing a large stimulus package in February of 2009. This plan was intended to jumpstart the economy by adding jobs and cutting taxes, but it was not a policy of austerity and it increased the national debt.
As a result, Congress attempted to decrease federal spending by passing many budget cuts.This means that instead of spending more to stimulate the economy, Congress took a conservative approach to reduce expenditure.
Budget Control Act of 2011Congress signed this policy on August 2, 2011. It raised the debt ceiling and decreased federal spending. The act represents an austere economic policy because it cuts federal spending to reduce the debt.It designated specific cuts totaling over $900 million over the next ten years.
The act also created a committee specifically intended to decrease federal debt, the Joint Select Committee on Deficit Reduction, also known as the Supercommittee.Finally, the act specified an increase in the debt ceiling as well as many budget cuts in areas such as Medicare if Congress failed to create a deficit reduction bill with at least $1.2 trillion in cuts.
Nov 2011: Failure of the SupercommitteeOn November 21, 2011 the members of the Joint Select Committee on Deficit Reduction issued a statement: they could not form an agreement to reduce the deficit.Both the republicans and democrats on the committee proposed plans to reach the required $1.2 trillion debt reduction, but they could not agree on tax policies.
2013 SequestrationsAs a result of the Supercommittee's failure, automatic budget cuts known as sequestrations went into effect on March 1st, 2013.These cuts impact critical organizations that benefit many American citizens.
For example, the sequester cuts funding for Medicare.Budget cuts have forced numerous teachers, policemen, and many others out of their jobs.Education, scientific research, and public housing have all faced drastic budget cuts.It may take years for these organizations to recover, if at all.
Austerity in Asia
Late 1990’s: Asian Economic CrisisAsia experienced a devastating financial crisis in the late 1990s. A decade later, Asia was comparatively protected from the full damage of the 2008 recession because of measures taken during the 90s.
On Asia’s Protection from the 2008 Great Recession"In 1998 our economy was devastated. It collapsed. We learned a lot. We had major reforms. We did many things. So 10 years later, when the economy was impacted, we were united – the government, private sector, regions. We also developed policies – fiscal policies, monetary policies – that protected us.” - Indonesian Prime Minister on Asian response to Great RecessionHowever Asia was impacted by the Great Recession and responded in various degrees of austerity
September 2008Many Asia-Pacific policy responses avoid austerity China cuts interest rates for first time since 2002Reserve Bank of India adds $1.32 billion through refinance operationIndonesia reduces rates for banks to borrow fundsBank of Japan put $29.3 billion into financial systemTaiwanese central bank cut reserve ratios for first time in 8 years
November 2008: Chinese StimulusChinese economic stimulus program is a RMB¥ 4 trillion ($586 billion) stimulus package to curb Great Recession from fully hitting the world’s second largest economy
China Invests to Curb 2008 RecessionChinese State Council invested in key areas like housing, rural infrastructure, transportation, health and education, and industry, and income building
2009: Japanese StimulusJapan announced $153 billion stimulus and investments in technology, employment programs, and new car subsidies
2009: South Korean StimulusSouth Korea’s cumulative stimulus package totals about $52 billion, not including tax breaks for industry investment Cash for Clunkers program boosted Hyundai and Kia sales
2013: Japan’s Abenomics Boosts EconomyJapanese PM Shinzō Abe successfully stimulated economy using unprecedented surplusboosting government spendingstructural reforms to make industry and institutions more competitive
Austerity in Europe
Faith in AusterityEuropean governments can only borrow from the IMF if they commit to strict austerity measures set forth by the EU in order to reduce deficits.Policymakers’ faith in austerity policies despite stagnance depended on the belief that spending cuts would have a positive effect on private sector spending. Consumers and investors were expected to be more confident because of the policies, and thus increase spending.
The Eurozone Economy Since 2008Eurozone Recession: 1st fiscal quarter 2008- 2nd fiscal quarter 2009The European Recession is part of the Great Recession which is generally considered to have started in 2009, but the global recession can first be seen in Ireland in the 2nd and 3rd quarters of 2007.
European Economic Recovery PlanIn November of 2008, the European Commission presented the European Economic Recovery Plan to push the European Union through the crisis. The original goal of this plan was that each of the European Union’s twenty-seven member states cuts their national deficit to a maximum of 3% by the 2014-15 financial year.
The Austerity Pledge: Examples of Intended Spending Cuts and Tax Increases in EuropeGreece: reduction of the minimum wage, increased flexibility in labour markets which weaken job security, a new property tax, and the suspension of 30,000 civil servants on partial pay. Italy: increased health care fees, increased pension ages, and cuts to family tax benefits, regional subsidies, and high earners’ pensions. Irish Republic: cut all public servants pay by at least 5%, closed police stations, and cut child benefit. Spain: 8% spending cuts, increased taxation of the wealthy, and an increase of 28% on tobacco tax.
European Instability in 2010The discovery of “severe irregularities” in Greece’s accounting procedures reveal that the 2009 budget deficit was not 3.7% as stated, but 13.6%Concern surrounding the heavily indebted Spain, Greece, Ireland and Portugal rises.In order to maintain the Recovery Plan, EU agrees to act over Greek debts, and by the end of the year provides bailouts to Greece and the Irish Republic under the condition that austerity measures will be implemented to reduce debt to GDP ratio. Austerity measures ignite strikes and riots in Greece.
European Stability MechanismJanuary 1, 2011 Eurozone finance ministers set up the European Stability Mechanism as a permanent bailout fund worth about 500 billion Euros.
Realization of National Bailouts, Borrowing and Austerity in 2011Under the European Stability Mechanism Portugal borrows for the first time, and Ireland and Greece continue to accept loans from the International Monetary Fund (IMF), all under the implication of enforcing strict austerity measures in their respective countries.
2011 ContinuedDespite widespread austerity practices across Europe, data released September 22, 2011 reveals that the eurozone’s private sector shrank for the first time in two years.Because austerity measures significantly reduced the number of government employment opportunities, unemployment rose and fear of unemployment rose even more, causing people to reduce, rather than increase spending.
Policies of Austerity Continue to Fail Europe Through 2012Greece seeks further bailouts and succumbs to lenders’ pressures, passing an unpopular austerity bill on February 12, 2012.March reveals that unemployment rate has reached a new high. Spain, Italy, and Greece face surmounting anxiety as borrowing costs increase and growth forecasts are reduced.
Relaxing Austerity DemandsFrance, Spain, the Netherlands, Portugal, and Slovenia now have more time to make spending cuts as to protect fragile economic growth. On average, each of these nations was granted an additional 2 years to reach 3% goal.Fear of unemployment, recession, and popular resentment towards the EU caused this easing of austerity demands on members of the Union.
Has Austerity Proven Successful?
Has Austerity Proven Successful?As the graph indicates, government expenditures in the US during the Great Recession are uncommonly low compared to past recessionsIf the US had applied the average trajectory of public spending for past recessions to the Great Recession, public spending would be roughly 14-15% higher today and there would be more than 5 million more jobs in the American economy
Has Austerity Proven Successful? The US, Europe, and Asia have responded to the Great Recession using varying levels of austerityOverall, fiscal austerity has kept Europe’s economy stagnant while Asia is experiencing more growth through stimulus and government investment. The US has fared better than Europe because of its 2009 stimulus, but conservative practices of austerity have largely held the US economy back from a full recovery