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Austerity Essay

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Below is an essay on "Austerity" from Anti Essays, your source for research papers, essays, and term paper examples.

Large government debts, in general, tend to cause problems. These problems tend to heighten when the economy is right in the face of a recession. What happens when a recession occurs? A rise in prices/inflation and growing unemployment are tall-tale signs of a recession. Because unemployment becomes such an issue in a recession, the need for unemployment and other services (Medicaid, Medicare, etc.) increase. Providing these things costs the government a decent chunk of change. The larger the debt, the harder it is to provide these things. This is especially true when unemployment is worsening so the government is not collecting as much tax money, which funds these programs, as they normally would be. When bad economic situations occur, governments often tend to increase things such as infrastructure and other job-creating programs. But doing so becomes harder when there is so much debt.
Austerity is defined as “A state of reduced spending and increased frugality in the financial sector” (investopedia.com). Higher tax rates create less money available for the people to spend to stimulate the economy. With spending being reduced, overall economic activity also reduces. As mentioned above, this creates a lot of unemployment which causes increased need for unemployment benefits. Less people have jobs, so the government is receiving fewer taxes to pay out for unemployment. GDP decrease which causes an increase in the debt-to-GDP ratio, even if everything else is constant. Due to these things, in the short-run, economic activity can slow and further contract- causing even greater government deficits.
If austerity seems to increase government deficits in the short-run, is it beneficial at all? Well, as we have seen many times in economics, the short-run effects and long-run effects are often different. At first, austerity causes an economic contraction due to an increase in taxes. Eventually though, these higher taxes will begin to lower the government deficit. With...

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