Introduction
Fiscal consolidation is a policy that is designed targeting the reduction of a national crisis. It works towards reducing the debts that are incurred by a particular nation as much as possible. The success of any fiscal consolidation policy depends largely on how the policy is designed and also on how it is implemented.
Fiscal consolidation can have both short term and long term effects. The policy is designed and directed towards achievement of positive results, although sometimes negative effects can result.
In order to achieve long term benefits, the policy must incorporate strategies that can freely adapt to various economies of the world. Some of the long run benefits of the fiscal consolidation are highlighted below.
Effect on demand
The fiscal consolidation policy has a positive long run impact on demand. This occurs when the government of a nation uses the consumption expenditure strategy in order to achieve the fiscal consolidation.
An increase in demand is usually achieved since savings of the government are generally improved, meaning that the overall savings of the nation also improve.
With improved savings, the real interest rates go down (Rother, Schuknecht & Stark 2010). This is a factor that contributes to an increase in aggregate demand since low interests will attract more customers. This is best illustrated in the banking institutions.
Increased outcome
In macroeconomics, outcome is the general output obtained as a result of incorporating labor, resources and capital. An increase in the three factors can contribute to an increase in a nation’s outcome. The use of Fiscal consolidation leads to an increase in the outcome of a nation.
We have seen that the government’s savings are generally improved through the use of the consumption expenditure strategy. The government increases its consumption expenditure by absorbing a given quantity of the nation’s resources.
This reduces the available resources to the households sector (Coenen & Strauab 2008). The decrease in resources to households forces them to reduce their consumption expenditure and in turn, increase labor supply. This is achieved by increasing the number of hours worked per head. More working hours, and more working people, increases the amount of output in the nation.
Increased investments
This is yet another benefit associated with the fiscal consolidation policy. So far, we have seen that, labor is increased as a result of increased number of working people and increased number of working hours. Since labour is readily available, the wages of workers are bound to fall.
This is true following the argument that shows that, whenever something is available in plentiful quantities, its value tends to go down (Rother et al 2010). Thus, although workers work for more hours, their wages reduce by a given rate.
In many economies, investors will try to invest in sectors where the wages for labour are reduced. They do this in order to intensify their profits while reducing their expenditure. Thus, there results a net increase in investments
Capital
An increase in investments means that more capital will be generated. Capital is the accumulated assets of a business. More capital will be in circulation. A high amount of capital in circulation within a nation has several benefits.
It leads to increased investments and also increased exports. An increase in exports leads to a further increase in the income of a nation. Increased exports are a key factor contributing to an increase in the aggregate demand (Liegh et al 2010).
This is because exports lead to an inflow of foreign income. An increase in exports also leads to a rise in the GDP. Although a rise in GDP is brought about by an increase in the exports, the domestic demand tends to be low, but this occurs in the short run.
Finally, another important benefit brought about by fiscal consolidation is the effect it has on finances. Fiscal consolidation leads to stabilization of finances. This is because; most of the possible financial crises are diminished.
For example, money market rates get standardized thus reducing financial spillovers. This is achieved since equilibrium is attained among all the factors that contribute the economic success of a nation (Coenen & Strauab 2008). These factors include the output, consumption, investments, foreign exchange, labour, capital and wages.
Conclusion
Fiscal consolidation has many benefits which arise in the long run. Many countries which had been experiencing overwhelming debts and global borrowing incorporated the policy and it worked well. An example is the Greek government.
The policy worked well and in the long run the economy of the nation became stable. The government was able to maintain their economy with no external borrowing. In most cases, the fiscal consolidation policy works well with developed countries.
This does not mean that the policy does not work in the developing countries. With proper incorporation of the appropriate strategies, the policy can successfully work in all nations.
Some of the strategies that can be used include the expenditure strategy, where much focus is directed to the general government and household expenditure plans. Another strategy that can be used is the revenue based strategy. All in all, fiscal consolidation has great impact on a nation.
Reference List
Coenen, G, Mohr, M, & Strauab S 2008, Fiscal consolidation in the euro area; long- run benefits and short-run costs. European Central Bank Working Paper Series No. 902. Web.
Liegh, D, Devris, P, Freedman, C, Guajardo, J, Laxton, D, & Pescatori, A 2010, Will It Hurt? Macroeconomic Effects of Fiscal Consolidation. Web.
Rother, P, Schuknecht, J, & Stark, J 2010, The benefits of fiscal consolidation in uncharted waters. European Central Bank Occasional Paper Series No. 121. Web.