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What are the governments economic reasonings behind their austerity programme? Watch

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    The question is basically in the title...hmmm :rolleyes:
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    They believe that in the absence of an austerity programme, there would be an increased risk premium on the price the government pays to borrow. This would mean, essentially, rising interest rates (hurting output) and a depreciating currency (so imports would become more expensive). Some factions of the government also believe in expansionary fiscal contraction; that government debt "crowds out" private sector investment that would be more efficient.

    It is a dubious case on multiple grounds. It ignores the highly relevant fact that we are at a "zero lower bound" on nominal interest rates, which changes economic relationships and optimal policy considerably. It ignores the fact that the UK has its own currency so can, in the event of a run, print money to pay back the ddebt (this is not an advocation of doing so, it's just a reason why a run would be far less likely in the UK than in Greece - investors know that their investment is safe in nominal terms due to the fact that the UK can bail itself out). It ignores the fact that interest rates are held down by low growth prospects (and hence a lack of other investment opportunities other than government bonds) as well as by government fiscal prudence. It ignores the fact that in a 'debt' overhang following a financial crisis, both consumers and the private sector will be deleveraging and so the government must step in to be the "borrower of last resort" to sustain demand and avoid a depression.

    Sorry - went on a bit of a rant there.
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    (Original post by Budgie)
    They believe that in the absence of an austerity programme, there would be an increased risk premium on the price the government pays to borrow. This would mean, essentially, rising interest rates (hurting output) and a depreciating currency (so imports would become more expensive). Some factions of the government also believe in expansionary fiscal contraction; that government debt "crowds out" private sector investment that would be more efficient.

    It is a dubious case on multiple grounds. It ignores the highly relevant fact that we are at a "zero lower bound" on nominal interest rates, which changes economic relationships and optimal policy considerably. It ignores the fact that the UK has its own currency so can, in the event of a run, print money to pay back the ddebt (this is not an advocation of doing so, it's just a reason why a run would be far less likely in the UK than in Greece - investors know that their investment is safe in nominal terms due to the fact that the UK can bail itself out). It ignores the fact that interest rates are held down by low growth prospects (and hence a lack of other investment opportunities other than government bonds) as well as by government fiscal prudence. It ignores the fact that in a 'debt' overhang following a financial crisis, both consumers and the private sector will be deleveraging and so the government must step in to be the "borrower of last resort" to sustain demand and avoid a depression.

    Sorry - went on a bit of a rant there.
    no! that was great! thanks
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    (Original post by JessicaGarlai)
    The question is basically in the title...hmmm :rolleyes:


    It's quite simple. We spend significantly more than we earn.
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    - We have a huge budget deficit
    - We need to pay off the debt before it becomes a burden on our economy
    - Cut spending so tax revenue can be used to pay off debt, rather than borrow to pay off the interest on the debt
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    All of the above, and to live within your means.
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    Clear up the mess that Labour started!
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    (Original post by MatureStudent36)
    It's quite simple. We spend significantly more than we earn.
    yeah thats the problem but the question is what is their reasoning. because seeing as were in a recession, how is cutting government spending and increasing tax gona help..

    ive got the answer now though
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    (Original post by JessicaGarlai)
    yeah thats the problem but the question is what is their reasoning. because seeing as were in a recession, how is cutting government spending and increasing tax gona help..

    ive got the answer now though
    Their reasoning is that cuts are the only way to get us out of the situation we are in. They also threw a few scare stories in the mix.

    The reality is that there are alternatives to the current plans.
 
 
 
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