Ex-post Social Cost-Benefit Analysis of Austerity

This study performed a social cost-benefit analysis of austerity as a policy measure. Austerity, the combined name for tax increases and government spending cuts, was introduced in many parts of the world after the economic recession of 2008 to improve financial fundamentals. The arguments of supporters and opponents of austerity are described and evaluated based on theory and empirical evidence. Then a social cost-benefit framework is constructed to calculate the social cost-benefit balance for eleven countries. Four of the eleven countries pass the social cost-benefit analysis and seven countries do not. Negative multipliers caused by the doom loop have led to positive net present values for austerity. For the other countries, large fiscal multipliers due to a binding zero lower bound and existing hysteresis have driven up the costs of austerity, while the benefits are negligible due to low interest rates on government debt.