Lisa Simpson
Mar 5,2010
In: Finance

The Option Swings from Austerity to Taxes

The option swings from austerity to taxes.

Lessons can be learnt from the Greek crisis to find an answer to the question as to what policy Washington should follow – austerity or taxes? Should the rich European countries condone the “profligacy” of Greece and bail it out. If Germany does this –other countries too would be encouraged to incur huge fiscal deficit and staggering government debts like Greece. The burden would then be passed on to the taxpayers of France and Germany. Thus Greece should be firmly told to follow the path of austerity and curtail its expenses so that surplus would be generated to clear its dues. This would lead to fall in living standards and unemployment; but this is the price Greece would have to pay even though the present government of social democrats is not responsible for this mess. The conservatives in the previous regime have gifted Greece with these troubles.
This it seems that like Greece, for any country with staggering debts there is only one door left open – cutting down of expenditures. The deficit is the gap between revenue and expenditure. According to economics this gap can be narrowed either by less spending or increasing taxes; there is another alternative of combing both. When the stress is laid on austerity it is assumed that taxes cannot be increased. In such a situation the only way out is to reduce expenses. The danger is that if Greece is told to be austere it would walk out of the EU.

But in USA the government is thinking of a whole swath of measures from levying taxes on bonuses and the rich. Financial deals would also be taxed. Both the Democrats and the Republicans in USA talking about austerity have allowed the piling up of huge deficits.

In 2008 when the crisis spawned by the private financial entities posed a risk to the entire financial system of the country nearly everyone became a follower of Keynes and wanted the government to increase spending. This spending termed as fiscal stimulus went to prop up the private sector rather than rejuvenate the real economy.

Many of the pundits avoid facing the truth that it is a cocktail of stepped up spending and fall in revenues that has resulted in the recession and has caused deficits right across the globe. This has contributed to the staggering increase in government debts. Consequently fiscal deficits that were til now looked upon as fiscal imperatives are now being said to be the result of fiscal “profligacy.”