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Finance minister Pranab Mukherjee on Wednesday(May 16 2012) said he would impose new austerity measures, howsoever unpopular they may be, to address India’s fiscal problems and spur growth. “I am going to issue some sort of austerity measures… whether people like it or not … to convey a signal that we are responding to the situation,” the minister said. He, however, did not spell out the measures.

While newspapers have been full of austerity measures, protests in Greece, France and European countries , for us it was just a news – happening to others., yes stock market was volatile but we were not affected directly. I was reminded of US President Ronald Reagan words “Recession is when a neighbor loses his job. Depression is when you lose yours.” When our Finance minister said the A-word, it seemed so close, so decided to explore the topic of Austerity Measures.

Austerity Defintion

As per dictionary aus·tere [aw-steer]  (adjective) means

1. severe in manner or appearance; uncompromising; strict; forbidding: an austere teacher.
2. rigorously self-disciplined and severely moral; ascetic; abstinent: the austere quality of life in the convent.
3. grave; sober; solemn; serious: an austere manner.
4. without excess, luxury, or ease; simple; limited; severe: an austere life.
5. severely simple; without ornament: austere writing.

It’s origin is in 1300–50, Middle English derived from Anglo-French, derived from Latin austērus , derived from Greek austērós meaning harsh, rough, bitter

In economics, austerity loosely defines policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending(the amount by which a government’s spending exceeds income over a particular period of time) and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency( ability to meet its long-term fixed expenses and to accomplish long-term expansion and growth) to creditors. Term Fiscal usually refers to government finance.  The policies that governments come up with are are called Austerity Measures.Quoting from Dave Manuel:Investor Dictionary

Austerity measures are strict measures that are undertaken by a government to help bring expenditures more in line with revenues. Austerity measures can be voluntarily implemented (for example, in order to bring deficits down) or involuntarily implemented (for example, if a country defaults on its debt and is given loans by the IMF).

“Austerity measures” usually include a combination of spending cuts and tax/fee increases.The most common example of “austerity measures” occurs when a sovereign government’s bond rating is downgraded. This makes borrowing more expensive, and usually forces the government to impose these new measures. Many European countries have either imposed “austerity measures” or are in the process of introducing them.

Austerity was named the word of the year by Merriam-Webster in 2010, because of the number of web searches this word generated that year. The term “Age of Austerity” was popularised by British Conservative Leader,David Cameron, in his keynote speech to the Conservative party forum in Cheltenham on 26 April 2009, when he committed to put an end to years of excessive government spending.”Over the next few years, we will have to take some incredibly tough decisions on taxation, spending and borrowing – things that really affect people’s lives,” Cameron warned.(Ref:guardian.co.uk:David Cameron warns of ‘new age of austerity’)He became Prime Minister of Britain in May 2010 elections. However, regarding policies designed to address fiscal problems, a more accurate term would be fiscal consolidation.

Ref:Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective (Jul 2011)

Austerity in World

Though Austerity measures came into focus in the 2008-2009 financial crisis and the ensuing debt crisescurrently afflicting the US and most European economies. Austerity is not a new phenomena , some of earlier examples are:

• From 1949 to 1959 Israel was to a varying extent under a regime of austerity. Ref:Wiki:Austerity in Israel
• 1985 Mexico Mexico’s Austerity Plans
• 1997 Nicaragua Ref:President Arnoldo Alemán Between the Fund and the Front
• 1991 – 1999 Cuba Ref:Wiki:Special Period

Europe is in the grip of tough austerity measures – some of the deepest public sector cuts for a generation. The colossal debts and rock-bottom growth of Eurozone nations – especially Greece and Italy – have hammered market confidence. The interest rates (yields) on their sovereign bonds have soared, making it hard or even impossible for them to borrow in international markets. Greece, Ireland and Portugal have all received massive bailouts from the EU and International Monetary Fund (IMF). The 27 EU member states aim to cut deficits to a maximum of 3% of GDP by the financial year 2014-15. BBC:EU austerity drive country by country lists the various belt-tightening measures that the European countries are taking. Austerity measures for some of them are listed below:

Greece: In the largest restructuring of government debt in history, lenders and banks wiped 105bn euros ($138bn, £88bn) off Greek’s debt burden. But in order to receive the new 130bn-euro (£110bn; $173bn) bailout, Greece has also had to implement stringent austerity measures such as cuts in pensions and civil service job cuts new property tax and the suspension of 30,000 civil servants on partial pay by the end of this year.

Italy: Silvio Berlusconi government adopted an austerity package in July 2011, featuring savings worth 70bn euros. It included increases in healthcare fees, and cuts to regional subsidies, family tax benefits and the pensions of high earners. When Mario Mont replaced Mr Berlusconi pushed through further austerity measures, including higher taxes for the wealthy, a rise in pension ages and a major drive to tackle tax evasion.In the public sector Italy has been cutting pay and freezing new recruitment. Only one employee will be replaced for every five who leave.

Portugal:In May 2011 Portugal became the third Eurozone country to receive a huge EU/IMF bailout – 78bn euros.The new government adopted a range of austerity measures, including a 5% pay cut for top earners in the public sector, a VAT rise of 1% and income tax hikes for high-earners.The military budget is being slashed and two high-speed rail projects have been postponed. There has also been widespread privatisation.

Vote No To Austerity Measures

The EU implemented austerity measures in order to bring their deficits and debt levels into line. Unsurprisingly, the austerity measures have proven to be unpopular with many EU citizens.Voters in France, Greece and Italy have given an emphatic thumbs down to candidates who have supported austerity measures.

In France, Socialist Francois Hollande defeated Nicolas Sarkozy to become the new President of the country.Francois Hollande was outspoken against the austerity measures. Instead, he argues, the country needs to spend more on teachers, housing, etc., and increase taxes on the “wealthy”. French voters agreed with Hollande and elected him as the country’s new President.

In Greece, voters turned on Conservative New Democracy and Socialist PASOK – two long-standing parties that were both in favor of the bailouts / austerity measures. According to the most recent polls, New Democracy garnered just under 20% of the vote while PASOK managed just 13.6%. In the last election, PASOK captured 44% of the vote.

In Italy’s local elections, candidates opposed to austerity measures are making a strong showing.

Anti-Austerity protests

Anti-austerity protests, chiefly taking the form of massive street protests by those affected by them and some of them also involving a greater or lesser degree of militancy, have happened regularly across various countries, especially on the European continent, since the onset of the worldwide financial crisis. Workers and students in Greece and other European countries demonstrated against cuts to pensions, public services and education spending as a result of government austerity measures. Upheavals in Tunisia and in Egypt in 2011 were originally largely anti-austerity and anti unemployment before turning into wider social revolutions. Some of the anti-austerity movements from Wiki:Anti-austerity_protests are:

• Occupy movement
• May–July 2011 Greek protests, also known as the “Indignant Citizens Movement” or the “Greek indignados”, started demonstrating throughout Greece on 25 May 2011
• 2011 Spanish protests, whose participants are sometimes referred to as the “indignados“, are a series of ongoing anti-austerity demonstrations in Spain that rose to prominence beginning on 15 May 2011. Thus, the movement is also sometimes referred to as the May 15 or M-15 movement as well.

Is there an Alternative to Austerity Measures?

There is huge debate over whether sovereigns should embrace austerity or increase government spending in an effort to boost demand and avoid a full-blown economic meltdown. Former U.S. Secretary of Labor, Robert Reich, recently wrote a commentary titled, “We Should Not Imitate the Austerity of Europe.” In it, Mr. Reich says “Blame [the recession] on austerity economics – the bizarre view that economic slowdowns result from excessive debt, so government should cut spending” He continued, “A large debt with faster growth is preferable to a smaller debt sitting atop no growth at all. And it’s infinitely better than a smaller debt on top of a contracting economy.”

But blaming a recession on the idea that an insolvent government was finally forced into reducing its debt is like blaming a morning hangover on the fact that you eventually had to stop drinking the night before. Isn’t high level of government spending supported by a compliant central bank caused the debt to GDP ratios to skyrocket to the point where governments are now deemed to be insolvent. Will adding even more public sector debt, most of which is printed, can fix the problem? Does Public sector spending help in grow an economy? Doesn’t it just add to the debt and thus, increases the debt to GDP ratio. It also takes away  money from the private sector. Forcing down a few more drinks to delay a hangover isn’t a very good strategy and it is impossible for individuals, or a nation, to stay drunk forever.

Austerity Measures in India

What Austerity Measures can we expect in India. Quoting FirstPost:FM’s austerity plan: Why it means higher prices for us all(May 2012)

So, austerity measures, huh? That’s the government’s plan to fix the economic mess we’re in. To cut the fiscal deficit – the gap between government expenditure and revenues – the government has decided it needs to take some ‘tough’ measures, or so it claims. The government has done pretty much all it can to raise revenues (it increased service and excise taxes in the Union Budget and seems to be also going ahead with a highly controversial retrospective tax proposal, as well the General Anti-Avoidance Rules), so that means it will now have to concoct new schemes to cut expenditure.

• One very likely possibility is by cutting subsidies on fuel, which is the biggest component of the government’s subsidy bill(Times of India:Petrol may rise Rs 5/litre, diesel Rs 3(May 2012))
• What else can the FM do? It’s not entirely clear but the steps will likely involve cutbacks in spending (which will affect demand) and/or raising prices for goods and services

Everything — including the government’s ‘austerity’ measures — points to higher inflation in the future and diminishing possibility of interest rate cuts. Worse, demand could drop, leading to an even further slowdown in growth. Austerity has its price — and consumers, businesses and investors will be paying it for a long, long time to come.

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I am scared, damn scared, maybe more than in 2008 crisis when there was Indian growth story to look to. Prices are going up, salaries are not, surely not at the same rate. And there is no end in sight – when will this all end? Will it end? How? What austerity measures would I need to adopt?What austerity measures are you planning to adopt?