Fiscal Austerity (Chain of Analysis) | tutor2u Economics
Exam technique advice

Fiscal Austerity (Chain of Analysis)

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

Here is an example of a chain of reasoning on the economic arguments for and against fiscal austerity

Fiscal Austerity (Chain of Analysis Revision Video)

Chain of reasoning (1)

Fiscal conservatives argue that a period of fiscal austerity is important for the long-term health of the economy. 

This is because a high budget (fiscal) deficit leads to rising national debt which can then lead to crowding out effects in financial markets and also the wider economy. 

If the government is borrowing more money, this increases the demand for loanable funds in capital markets made available by domestic and overseas savers…. 

….which then causes an increase in the equilibrium real interest rate for other agents wanting to borrow 

For example, a rise in government bond yields will cause mortgage interest rates to rise which lowers effective disposable incomes for home-owners 

And higher market interest rates also makes planned capital investment more expensive for businesses. Lower investment can hold back the growth of long run aggregate supply.

Chain of reasoning (2)

The extract says that government spending has dropped by 5.9% of GDP since fiscal austerity began in 2010. 

One reason for this is that the government has introduced caps on the growth of public sector pay with wages rising by only 1% a year since 2013 

A possible consequence is that it has become harder to recruit people into key public sector jobs such as nursing, midwifery & social care. 

This has led to a fall in the number of people choosing to work in the NHS because of the resulting decline in real and relative wages  

As a result, with growing demand for NHS services because of an expanding & ageing population, the NHS has had to use private supply agencies. 

Therefore, wage costs have risen anyway and staff shortages have also led to increasing delays for treatment e.g. in A&E departments.

Subscribe to email updates from tutor2u Economics

Join 1000s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uEconomics on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Job board

Temporary Teacher of Mathematics

Frensham Heights School, Nr Farnham, Surrey

Teaching Vacancies


Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u

A New Home for tutor2u Resources

We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.