All of us know a guy who tends to spend more whenever he makes more.
The moment he gets himself a good paying gig, he goes out and gets a
new TV, a better computer, and starts buying all his lunches take out.
Inevitably, our friend winds up just as broke as he was before the new
job, and as a result, suddenly becomes dissatisfied with the money he
makes. "I gotta find another job!" he'll say, "the scratch I'm making
now just isn't cutting it." If only he'd be more aware of how much it
he's trying to cut…
Well, governments can be the same way. Governments like to keep their
expenditures and income right around the same level ("government
income" is just fancy talk for the revenue collected from taxes). As
far as I know, there's no rainy day fund jar on top of the fridge at
the Treasury Department, or a "take a penny, leave a penny" tray at
the Federal Reserve. Governments don't collect money just for the
sake of collecting it.
So what happens when a government DOES have a rainy day? If a
government's debts and deficits are starting to get out of hand (like
in the US), if their mismanagement is causing real economic problems
in the private sector (like Ireland), or if they go just plain flat
broke (like Greece)?
In these circumstances, governments often call for something called an
"Austerity Plan."
Austerity plans are pretty straight-forward. The process works like
this:
Step 1. Increase government income. I.e. raise taxes.
Step 2. Decrease government spending. I.e. cut
government activity and service.
It's similar to the advice we'd give our friend who is
spending his pay at the same speed he's receiving it. "Make more and
spend less." Have a 'cushion.'
Raising taxes is the governmental equivalent of
finding better paying work; its just their way of upping their
income.
And what does a decrease in government spending look
like? It looks like a government doing less of the things that
government does. It might lay off some of its employees. Roads,
communications satellites and electric power grids that were going to
be built this year might be put off until later. Research can be
deferred, pensions squeezed or social safety nets limited in scope and
scale.
They may cut entire programs, or just trim a little bit here and
there. It all depends on the size, strategy and duration of the plan.
The goal is to get the government in control of some
extra cash that they can use at their discretion, to pay off debt, to
buy up assets, fund a short-term projects or stimulus…the exact usage
will be dictated by the particular economic issue that particular
government is trying to beat.
Read more at: http://economystified.blogspot.com/2011/09/austerity-plans.html
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