Economics, 3rd Edition

Austerity or Growth?

The arguments outlined above crystallize the debate over the importance of austerity policies. Whilst there 

might be general agreement that countries do need to get more control over debt and their deficits, the 

current policies being adopted are, some argue, counter-productive.

In the UK, the Chancellor has had to announce further cuts in public spending and observed that 

 austerity would have to last much longer than he originally thought. Opposition politicians have argued 

that the government went too far too quickly with its austerity measures and that the continued weakness 

in the economy was testament to the fact that austerity was not working to reduce the deficit and debt. 

Why the difference?

One reason is the assumptions that underpin the models that are used in calculating the effects of 

austerity. In the UK, the independent Office for Budget Responsibility (OBR) based its calculations on the 

assumption of a fiscal multiplier of 0.5. In other words, every 

£1 of cuts in public spending would reduce 

economic output in the economy by 50p. The IMF have estimated the size of these fiscal multipliers to 

be much higher, atsomewhere between 0.9–1.7. At the upper end of the estimates of the fiscal multiplier 

the effect on the economy is considerable. Estimates have put the effect of the government’s cuts at 

around 8 per cent of GDP over five years if the fiscal multiplier is assumed to be 1.3, about the middle of 

the IMF’s range. The government of the UK would argue that even if the size of the fiscal multiplier was at 

this level, some of the effects would be offset by the level of quantitative easing by the Bank of England.