The Pros And Cons Of Austerity Policies

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There are many varieties of fiscal policies which are used by the state apparatus of the country. In this essay we will consider one of them – austerity. In today's economy, austerity policies generally recognized as low efficient tool to deal with crisis. However, often based on political rather than economic and financial considerations, austerity continues to apply, and sometimes imposed on countries that have lost control over their finances. Countries use austerity measures to avoid the sovereign debt crisis. That is, when creditors begin to worry that the country does not fulfill his debt. This usually occurs when the ratio of debt to GDP is above 90%. This means that the debt is almost as much as the economy produces in a year. Austerity policies may be imposed like an effort to demonstrate financial discipline of government to their creditors and credit rating agencies, bringing revenues closer to costs; they can be politically and ideologically driven too. Austerity is expressed primarily in cuts of salaries and social packages of public sector employees, reducing of pension and other socially oriented programs with parallel…show more content…
In order to understand what are the pros and cons of austerity measures, let’s consider austerity in Portugal. Portugal suffered from the combination of next three things: low growth, an aging population, and low productivity. When, in 2010, the crisis started in Greece, forcing many investors worried for the risk of holding Southern European debts, Portugal's 10-year bond interest raised from about 4% in late 2009 to a high of about 17% in early 2012 . The government budget deficits, as percentage of GDP, increased from about 3.5% in late 2008 to 6.3% in late 2012 (Graph 1). The government debt-to-GDP ratio increased respectively from 71.5% in late 2008 to 123.3% of GDP in late 2012(Graph 2). Graph 1: Portugal Government Budget

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