At the time of crisis, the only option available for the business whether public or private is to limit its expenses. Austerity measures in an economy are official steps by the government to support the financial and economic position of a country. It is done by curtailing the spending or/and increasing the tax rate.
After the 2008 global financial crisis, many economies have still not been able to survive the shocks and aftermath. The continuous rise in budget deficits and a greater decline in tax revenue, as well as investments, increased the pressure on the government. Printing money (Inflation) is not a suitable option for countries especially in the Eurozone. Thus, they have taken austerity measures to sustain in the market.
The eventual goal of taking an austerity measure is survival during the recession period. The plan involves increasing the tax rate to generate tax revenue, curtailing the public spending and privatization if possible.
Tax Rate on commercial, property and luxury items can be raised however on other items the government has to levy a lower tax to avoid any retaliation from the opponents as well as the public.
Public Spending cut involves termination of temporary contracts, reduction in defense, education, health budgets and subsidies, freezing the job hiring process and wage and benefits cut.
Privatization involves selling shares of ownership of government businesses in the market in order to earn revenue. There are both pros and cons to privatization, but during the economic crisis, governments do take decisions against the will of people.
A team of economists and finance expert sits down with the government to plan the best model combining all the three options of austerity measures. Several proposals from different stakeholders are taken into consideration while deciding upon the optimal combination. A series of discussions and heated debates are carried out to finalize a single proposal which is forwarded to the head of government for approval.
Austerity measures can be contentious at both the political and economic level. Inequitable distribution of resources and spending cuts on health and wages can affect the low-income class and bring them on streets against the government. Moreover, austerity also poses a threat to the foreign investors and businessmen, warning them to secure their assets before the government falls out.
Thus, the decision of austerity measure is vulnerable to criticism and protests, but when survival is at stake, the government is left with no option but to think strategically and devise a measure which can provide a cushion on an immediate basis and give time for long term planning of overcoming deficits of a nation.