Debating austerity

At the crux of the book is the notion that when governments are facing an unsustainable debt position, it is much better to rein back deficits through spending cuts rather than tax increases

Austerity: When it works and when it doesn’t 

Alberto Alesina, Carlo Favero, Francesco Giavazzi 

Princeton University Press; Pages 276

Under the basic Keynesian model, the impact of austerity measures on the economy is quite straightforward. Cuts in government spending reduces aggregate demand, which leads to a fall in output, lowering gross domestic product and private income. This creates a multiplier effect as a fall in private consumption translates to a further fall in output.

The greater the propensity to consume out of current income, in other words, the lower the propensity to save, and the greater is the multiplier effect. This fall