Wednesday, 10 January 2018

Austerity: If you care about the deficit so much, why not raise taxes?

Many economists have argued against undertaking austerity when the UK’s borrowing rates were so low (at the zero lower bound of interest rates). Austerity is all about getting the government deficit down in order to reduce the amount of government borrowing. But why is austerity always framed around government spending? Why are taxes, the other side of the deficit equation, often ignored?

I think the main reason for this is that austerity within the UK took the form of spending cuts rather than tax rises. Some people opposed the UK’s austerity because of the fact that government spending is used as a tool to redistribute to the poor. But what if, to reduce the deficit, taxes were levied on the rich? One argument is that increasing taxes will reduce growth making it harder to pay back the deficit. But this is precisely the same argument against austerity: reducing government spending will reduce growth making it harder to pay back the deficit.

There may be some reasons why cutting spending rather than raising taxes may have less of an effect on growth. For example, some governments may find it hard to raise revenue through taxation due to tax avoidance. Tax changes may have more of an effect than government spending etc. Nevertheless, there are clearly distributional concerns here which I do not think enough economist at the time commented on: the concern seemed to be about the aggregate management of the economy rather than the distributional implications of the way austerity was being implemented.