Does Austerity Work?

With the UK Budget being announced this week all eyes will be on George Osborne. Over recent years the UK, along with many other nations, have implemented severe austerity measures in order to reduce public debt following previous years of excess spending.

There has been great debate as to whether austerity measures actually work. Within the UK the government hoped that as they cut spending and reduced public sector jobs, the private sector would grow and pick up the slack. However, what we have seen is that the private sector has not been strong enough to fully step in. The results of this has been that the austerity measures imposed have not been quite as severe as originally planned, and that the general UK consumer has been squeezed. This has led to poor growth numbers and some argue highlights that austerity just doesn't work. 

So what else can the Government do? One argument is to spend heavily on projects such as infrastructure. In the short term this would increase public debt, but could be facilitated at very low interest rates. The spending would create jobs, which through the multiplier effect would lead to the money flowing through the economy. Improving our infrastructure would also make the country more attractive to businesses and we may see more companies choosing to locate in the UK, which would help with employment and also corporation taxes. The success of spending is not guaranteed, but given the failure of austerity it could be worth a shift in policy.