Stimulus Package versus Austerity Measures

The rationale behind implementing austerity measures is that it will increase confidence and encourage recovery. Business confidence" will spike as soon as everyone sees that the government is finally getting its fiscal house in order. But there is no evidence to support the hypothesis. Despite UK prime minister David Cameron's slashing and burning, no one's confident, and the government just had to revise its growth At Washington, lawmakers are quibbling about a few tens of billions of dollars of spending cuts and even the party that's supposedly "serious" about cutting our deficit refuses to tackle the real problem and thinks that no one's taxes should ever be raised. You lose the tax revenue if austerity measures are taken. Government deficits are a consequence of the crisis, not its cause. Hence austerity measures treat the symptoms rather than removing the cause. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way. Keynes high public payroll means high household consumption and higher imports, which in turns means high receipts from VAT The stimulus package are basically tax-payers money; hence it is reasonable to use tax-payers money to leverage their recovery Spending creates jobs If the private sector is not spending enough to keep unemployment low, increased government expenditures, lower taxes, or lower interest rates can be used to lower unemployment; However, there are times when lower taxes and/or interest rates will not induce more spending. Why? Because individuals and business are worried about the future. In these circumstances, only increased government spending will create jobs. The EUR countries, Greece and Spain, have been forced into severe austerity programs. The IMF believes these programs will cause unemployment to increase. Unemployment in these countries is already extremely high. Austerity supporters argue these steps will instill confidence and more spending. But we expect the outcome will be more strikes and governments not making prescribed targets. If one is to judge the imposition of the austerity measures in historical terms it would be very difficult to show that the austerity (a weapon of choice for the financial and political elites) has been anything more than a failed social experiment. Hence we believe that stimulus packages can help an economy recover from recession and grow sustainably in long term.