To achieve macroeconomic goals in an economy, the government may be forced to undertake monetary policies. The decision on whether to undertake monetary policies in an economy is based on monetary policy reports provided by analysts, financial experts, economists and investors. This is often necessitated by the need to promote sustainable economic growth through controlling consumption, inflation, liquidity and growth. Among ways in which the government may undertake monetary policies include regulating foreign exchange rates, selling or buying government bonds, changing bank reserves requirements and controlling the interest rates. Austerity and stimulus are some of the strategies the government may undertake to help achieve macroeconomic goals.
What is Austerity?
These are economic policies undertaken to control public sector debt by a government. It is used to measure the response of governments that have huge public debt. Austerity only occurs where the difference between government expenditure and receipt reduces.
Types of austerity measures include:
- Austerity with a focus on revenue generation. While this supports more government spending, the goal is to capture benefits via taxation and stimulate growth.
- The Angela Merkel model which focuses on reducing nonessential government spending and raising taxes.
- Austerity based on lower government spending and taxes.
Most economists consider reducing government spending as an efficient means of cutting the deficit. Government spending often takes form in subsidies, grants, entitlement programs, benefits to government employees, provisions for national defence and foreign aid.
An austerity program may involve:
- A temporal or permanent reduction of government services
- Pension reform
- A freeze of government layoffs and hiring
- Restricting travel
Although the goal of austerity is to reduce government debt, the effectiveness is unknown seeing that the deficits can suffocate the economy even more.
What is Stimulus?
This is an action undertaken by the government to increase economic activities by taking part in fiscal policy as well as specific expansionary monetary policies. Usually employed in times of a recession, it is used to elicit a positive reaction from the private economic sector.
Among the policy tools used to effect economic stimulus include increased government spending and lower interest rates.
The model argues that increased private spending will then boost economic activities. However, this model also has risks. For instance, government defaults and hyperinflation could occur.
To stimulate growth, governments use various tools to influence the pace of economic growth. The government could also engage in fiscal stimulus whereby a government takes measures to reduce regulations or taxes or increase government spending. Monetary stimulus involving purchasing securities or lowering interest rates may also be undertaken to make it easier to invest and borrow.
Similarities between Austerity and Stimulus
- Both are policies undertaken by the governments to stimulate economic growth
Differences between Austerity and Stimulus
Austerity refers to economic policies undertaken to control public sector debt by a government. On the other hand, stimulus refers to an action undertaken by the government to increase economic activities by taking part in fiscal policy as well as specific expansionary monetary policies.
While austerity attempts to reduce government spending through policies such as cuts on public spending and tax increases, stimulus attempts to stimulate economic growth through fiscal and monetary policies.
Austerity vs. Stimulus: Comparison Table
Summary of Austerity vs. Stimulus
Austerity attempts to reduce government spending through policies such as cuts on public spending and tax increases. On the other hand, stimulus attempts to stimulate economic growth through fiscal and monetary policies. While austerity has been effective in a few cases, it should only be used when necessary as it can strain people’s lives.
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