Austerity And The Government Budget Deficit

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Austerity refers to a system of reducing government deficits. The policies entail reductions in public spending, raising taxes, or a combination of both. They attempt to curtail government spending in an effort to control public-sector debt, particularly when a nation is in jeopardy of defaulting on its bonds. A government budget is a government document presenting the government's projected revenues and proposed spending for a financial year. The government budget balance is the overall difference between government revenues and spending. If the balance is a positive one, the government has a budget surplus, and if the balance is negative, it has a budget deficit. In the case of lower demand, a reduction in public spending combined with higher taxes will result in lower aggregate demand and a reduction in economic growth. As output falls, firms will employ fewer workers, resulting in increased unemployment, and if the economy is unable to recover, the newly unemployed will become the chronically unemployed. Government spending cuts may also result in public sector workers being made redundant. Moreover, media coverage also impacts consumer and business confidence negatively. Reports about job losses, in particular, will encourage households to save rather than spend. This …show more content…

As aggregate demand falls, so will tax revenue. Sales tax, income tax and corporation tax, among others, will fall as consumption and investment fall. At the same time, transfer payments will increase as the number of unemployed and those needing government support increase. Spending on food stamps, for instance, will increase as more lower income households find it difficult to make ends meet. Without the boost provided by increased public spending, aggregate demand could remain weak for some time, resulting in increased transfer payments for a significant

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