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The Irish economy entered a deep depression in 2008 with its economy shrinking by 10% by 2009. The government was forced to turn to the European Central Bank, the European Commission and the International Monetary Fund for €67.5bn. To pay off these debts the government was forced to use fiscal austerity. The government introduced a large amount of welfare cuts and increases in tax; lower-paid workers had been brought into the tax net, the bands for tax have been lowered and an increased rate of VAT from 21% to 23% has been introduced. The use of austerity in Ireland has allowed for a significant reduction in budget deficit from a 32.1% deficit in 2010 to 0.4% budget surplus in 2019. On the other hand, the cuts in welfare and increase in tax negatively affected the lower/middle class. It drove more people into unemployment and poverty while also increasing income inequality. sorry @anonymous ↓↓↓

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Between 2013 and 2015, the Portuguese government cut wages by 5% for top government workers, raised VAT by 1% and increased taxes on the wealthy. It also cut military and infrastructure spending. Additionally, it increased privatization.

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The paradox of thrift refers to the phenomenon in which an increase in household saving produces a decrease in aggregate demand and thus a decrease in gross output which actually lowers total savings.

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Blyth argues that austerity is counterproductive as it increases inequity: those who rely on government aid during a recession will suffer more due to the lack of it and the increased taxes than people who have more wealth.

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Austerity fiscal policies aim to reduce government spending and increase taxes in order to reduce government budget deficits and debt during a period of weak economic growth.

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President Franklin D. Roosevelt used contractionary policy too soon after the Depression. He was reacting to political pressure to cut the debt. The Depression came roaring back in 1932. It didn't end until FDR geared up spending for World War II. That was a massive return to expansionary fiscal policy.

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According to the paradox, the increase in autonomous savings leads to a decrease in aggregate demand, a decrease in total output, and a decrease in total savings.

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According to the paradox, the increase in autonomous savings leads to a decrease in aggregate demand, a decrease in total output, and a decrease in total savings.

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Austerity is a set of political and economic policies aimed at reducing government budget deficits through spending cuts, tax increases, or a combination of both. Tightening measures are used by governments that are hard to pay their debts.

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Austerity is a set of political and economic policies aimed at reducing government budget deficits through spending cuts, tax increases, or a combination of both. Tightening measures are used by governments that are hard to pay their debts.

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Greece owned the European Union a dangerous amount of sovereign debt, primarily between 2008 and 2010. To avoid a default on it’s debt the EU loaned approximately 320 billion euros, making it the biggest financial rescue in history. In return the EU forced Greece to adopt austerity measures. This triggered the eurozone debt crisis. This forced Greece to lower its trade barriers and increase exports and reform its pension system. This system was previously absorbing 17% of its GDP, a greater percentage than any other EU country. One out of five Greeks exceeded the age of 65, making this is severe issue. Austerity measures as a while cost Greece 72billion euros, 40% of GDP and a 25% percent shrink in the Greek economy, which reduced tax revenues needed to repay debt. Unemployment rose to 25%, youth unemployment hit 50%. There was a political outbreak. However, in 2017 there was a surplus of 0.8%, with its economy growing by 1.4%. Unemployment remained ridiculously high and a third of the population lived below the poverty line. It’s debt to GDP ratio was 182%.  Government spending currently makes up 48% of the GDP despite the austerity policy that was put in place. The government has shrunk but it’s still inefficient. Tax evasions are gaining popularity. Wages are lower, so many jobs are part-time, hundreds of thousands of skilled workers have therefore left the country. Banks are still hesitant to make loans to businesses therefore recovery is slow. It’s clear that whilst Greece has shown signs of recovery, austerity has failed to serve as a viable economic solution. Nevertheless, with its extreme and irresponsible government spending and the lack of a flourishing private sector, there seems to be no other choice.

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Popularized by the renowned economist John Maynard Keynes, the paradox of thrift explores the idea that as individuals try to save during periods of economic recession, this leads to a fall in consumption and investment which results in a lack of economic growth and possibly further recession. The concept revolves around the spending of an individual or the government, being someone else’s income. This eventually hurts the economy as a whole.

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Effects of austerity are felt differently across income levels. Those at the bottom suffer much worse as they rely on public spending and can’t afford to deal with the increased burden. Additionally, this is emphasized with higher taxes and reduced welfare. Moreover, “We can’t all cut our way to growth at the same time”, the debt is someone’s income and therefore whilst we might be under the illusion of prosperity, the reality is that in the long term even the saver is worse off than they would’ve been originally. The paradox of thrift. “If we all cut at the same time, there is no consumption to stimulate investment”. In relation to government policies, this reflects as the lack of stimulation from the government has a multiplier effect reducing economic growth and therefore inhibiting that which facilitates paying off debt. Automatic stabilizers, spending goes down when the economy prospers.

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Fiscal Austerity –Policies that aim to reduce government budget deficits through increases in taxes, spending cuts or a combination of both factors. 

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Fiscal Austerity –Policies that aim to reduce government budget deficits through increases in taxes, spending cuts or a combination of both factors. 

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A recent example of a government implementing austerity measures was in the United Kingdom, after the financial crisis of 2008. The British government had cut back on close to 40 billion dollars in welfare payments, housing subsidies and social services. The British economy was clearly negatively affected by such policies, as the levels of poverty dramatically increased and social wellbeing was at an all-time low. Moreover, the use of foodbanks rose as well. In the article by the New York Times, it is discussed how crime rates in the UK has also increased, in connection with the austerity policy. Overall, austerity measures in the UK were not fully beneficial and did not fully reduce the deficit.

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Blyth argues that not everyone can cut back spending at the same time, this is referred to as the Paradox of Thrift. This paradox describes how savings are higher during a recession, therefore consumption will fall, as well as AD, slowing down economic growth. Hence, saving is beneficial to the individual but not to the whole population.

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Austerity policies are usually quite controversial as one person’s income is another person’s spending, this meaning that the public’s spending (money paid from taxes) is the government’s “income” (tax revenue). Therefore, austerity is beneficial for the government but not necessarily for households. Additionally, due the progressive tax system in most countries, many individuals suffer more than others due to the income tax bracket

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Austerity measures are implemented when the government seeks to reduce its public debt. These measures include cutting back on government spending and increasing taxes. Austerity is typically implemented post-recession when the government has incurred a lot of debt.

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Example of a contractionary fiscal policy

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Example of a contractionary fiscal policy

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Following the great recession in the 2000s, the UK carried out the

"United Kingdom government austerity programme" (which is a contractionary fiscal policy) with the aim to reduce govt debt. This was done by reducing govt spending and increasing taxes --> by 2019 "more than 30 billion pounds in spending reductions have been made to welfare payments, housing subsidies and social services". The policy was rather unsuccessful as many necessary sectors in the economy were not sufficiently 'taken care of' by the govt. In other words, the cuts came from sectors of great importance to the public.

e.g.--> child poverty increased substantially

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an economic theory suggesting that the likelyhood of consumers saving up money during a recession is great, hence  leading to an inwards shift of the aggregate demand, implying that economic growth is hindered.

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a set of policies implemented by the govt in order to regulate, or in many instances, reduce public debt. The policy consists of increasing taxes and/or cuts in govt spending in order to compensate for the debt.

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In an attempt to recover from the vast debt caused by the great depression, Franklin Roosevelt, introduced a contractionary policy to decrease government debt through cuts in government spending and higher taxation. However this came too soon after the depression resulting in a second recession which lasted up until the start of WWII

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The Paradox of Thrift theory suggests that during a recession, savings are doing more harm than good to the economy. With more spending the economy would have a greater net positive outcome, than with savings.

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Blyth suggests austerity does more harm to the lower and working class (the majority of the country's economy) than it does the rich. With increases in taxation or cuts in government spending, those who all ready have very little, are more likely to lose proportionately more than the rich.

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Fiscal Austerity is a policy type targeted at controlling government debt. This is done through cuts in government spending, taxation, etc.

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Fiscal Austerity is a policy type targeted at controlling government debt. This is done through cuts in government spending, taxation, etc.

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The paradox of thrift states that when more money is trying to be saved during an economic recession aggregate demand and drops which also as a result, the economic growth.

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The paradox of thrift states that when more money is trying to be saved during an economic recession aggregate demand and drops which also as a result, the economic growth.

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Austerity is not very efficient or successful in the sense that people from lower classes will suffer more because people with high income are less dependent on government issued public services as they have the money to pay for their needs. Austerity also creates a ‘ paradox of thrift’ where if everyone is saving then there is no investment as a result of decreasing consumption.

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Austerity is not very efficient or successful in the sense that people from lower classes will suffer more because people with high income are less dependent on government issued public services as they have the money to pay for their needs. Austerity also creates a ‘ paradox of thrift’ where if everyone is saving then there is no investment as a result of decreasing consumption.

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Austerity is a set of policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. Austerity policies are usually implemented by governments in an attempt to pay their debts

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Austerity is a set of policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. Austerity policies are usually implemented by governments in an attempt to pay their debts

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During a recession, consumers are more likely to try and save more money leading to a greater fall in AD and therefore also a greater fall in economic growth.

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Those with lower income are more reliant on public sector services and therefore will experience more disadvantages from austerity than those with a higher income.

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A set of economic policies implemented by a government to control debt