FISCAL AUSTERITY POLICY IMPACT ON WELFARE

The ongoing global financial and economic crisis has caused a dramatic fall in growth, increased deficit, higher unemployment rates and strong price fluctuations. To achieve a balanced budget and reduce the national debt, the most of the national government have sacrificed the employment one of the main indicators that reflect societies’ well-being and implemented fiscal austerity policy. The aim of this paper is to contribute to the literature on this topic and assess the short analysis of fiscal consolidation. Despite the ongoing debate and numerous studies no consensus about whether and when austerity is likely to be beneficial has been achieved. Further, there are still open issues to understand the impact of austerity on poverty and welfare because of the difficulty of defining poverty and welfare also. The main conclusion is that the emphasis should be placed on correctly defining austerity methodology in a broader economic and social context.


INTRODUCTION
to achieve the long term sustainable growth, we cannot separate social and economic context of fiscal sustainability.
the sustainability of fiscal policy in a world of financial turmoil has become an important issue in the economy.interest rates on government debt rose dramatically and europe after more than five decades faces again with rising public debt and high budget deficit.concerns about fiscal imbalance have implied a shift from fiscal stimulus to austerity.to achieve a balanced budget and reduce the national debt, the national government has sacrificed the employment -one of the main economic indicators that reflect societies' well-being.cutting social security, health care, spending on education, has negatively affected economic growth, poverty and social stability especially in weaker member states.Further, significant variation in economy between the eu's member states have followed different paths to austerity.Despite diversity of national economies fiscal tightening became an almost universal recommendation and implemented policy.
Further, there are still complications to define the impact of austerity on poverty and welfare because of the difficulty of defining poverty and welfare also.consequently, we have incomplete picture and obstacle for growth and development.
since structural adjustment policies have high social costs (have depressed employment, have led to large migration, have increased the cost of health care, education and other elements of well-being) the critical challenge is how to achieve public debt sustainability and decrease unemployment, poverty and inequality at the same time.
the purpose of this study is to analyze social and economic context link to sustainable growth.the answer can help policy maker on deciding if/when should governments undertake austerity policy.While there is no clear answer to the question, it may be useful to review recent research and analyze the moral hazard and the credibility of "belt tightening." this paper has four parts.Firstly, it reviews the extant literature, then data analysis are presented and discussed.the paper concludes with a discussion of theoretical and statistical implications and directions for further research.
For example Perotti 1996Perotti , alesina and ardagna 1998Perotti , 2010, romer and romer 2010, found out that fiscal adjustments based on spending cuts or spending-based consolidation compare with fiscal adjustment based on tax, are more efficient in reducing public debt and led to economic growth.in contrast, chang 2011, Krugman 2012, Galbraith 2014, Blyth 2013, calcagno 2012, pointed out that more fiscal adjustment will only worsen the downturn, and that austerity is a dangerous idea and it is not a solution.Further, auerbach and Gorodnichenko 2012 pointed out that fiscal consolidation has adverse effect on the economy during a recession than during an expansion.
Despite the growing literature, there is a lack of empirical investigation on defining the methodology of austerity especially in defining austerity methodology which will implement economic and social context.Krugman (2012;232) noted: "anyway, the point is that out the question of how economy works should be settled on the basis of evidence, not prejudice." Whereas there are conflicting points of view in attempt to answer the question "are more/less government spending or tax increases or decreases more effective in reducing public debt and less harmful for economic growth and development" a chronological review of previous theoretical research and empirical studies are presented in table 1. and table 2.  this paper examines the relationship between fiscal deficits and growth for a panel of 45 developing countries.the analysis suggests that while the impacts on the growth of taxes and grants are reasonably straightforward, the implications of the deficit is likely to be complex, depending on the financing mix and the outstanding debt stock.
the aim of this paper is to show that the analysis of the twin deficit, the deficit of the current account and the state budget must be extended to the notion and analysis of the triple deficit, the same two deficits and the deficit of insufficiency of domestic savings.the result is contradictory to the common view that all problems are the consequences of state overspending and all of them can be solved by reducing the budget deficit and by cutting state expenditures.

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Romina Pržiklas Družeta, Marinko Škare Fiscal austerity Policy imPact on WelFare YEAR AUTHOR RESULTS alesina and ardagna they examined the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in oecD countries from 1970-2007.they confirm with the regression analysis that also, adjustments on the spending side rather than on than tax side are less likely to create recessions.alfonso, a. using alternative approaches to determine fiscal episodes (eu-15, period 1970-2005) they assess expansionary fiscal consolidations in europe, via panel models for private consumption.they conclude that there is some concurring evidence for several budgetary spending items while the asymmetric effects of fiscal episodes do not seem to be corroborated by the results.romer and romer the paper investigates the impact of tax changes on economic activity.the behavior of output following these more exogenous changes indicates that tax increases are highly contractionary.sever et.al.
the objective of this paper is to analyze the relationship between government budget spending and the effect on the growth and structure of the GDP of croatia during the past two decades.the main result showed (Var analysis) that the structure of expenditures is essential for the effects of budgetary spending on economic growth.the reduction of capital expenditure reduces the growth of the economy in the long and short run.Zezza, G.
Paper presents a framework to assess the impact of fiscal austerity in the euro area, as a response to the turmoil in the financial markets.their analysis suggests that fiscal austerity in the presence of large public deficit will have strong implications for redistributing income from taxpayers to the owners of such debt, who are likely to save a larger share of their disposable income.auerbach and and Gorodnichenko a key issue in current research and policy is the size of fiscal multipliers when the economy is in recession.using regimeswitching models, they find large differences in the size of spending multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions.

DATA ANALYSIS
this chapter presents a framework to assess the analysis of austerity policy for 10 eu countries1 in the period after a global financial crisis.
namely, because of the problem of high public debt (especially countries which have exceeded the threshold value of 60 percent of GDP) and contraction in GDP growth rate, most governments are at the crossroad between a policy of fiscal stimulus (that should promote employment) or fiscal adjustment.
While most of the developed countries have been using first options, the weaker member states to reduce high debt promote the sharp cuts policy-fiscal austerity.However, the problem is that the same weak national economies which should promote politics of austerity have still a problem with the deficit reduction and high public debt and at the same time major problem with unemployment, poverty, and inequality.From the table 3. we can see that in 2013 countries exceeding the threshold value of 60 percent of GDP of general government gross debt (% of GDP) were: Portugal 128%, italy 127,9%, Greece 174, 9%, spain 92,1%, croatia 75,7%, uK 87,2%, and Germany 76,9%. in contrast, there are countries like latvia reaching 38,2%, lithuania 39%, estonia 10,1%.Further, GDP growth rate in 2013 in Portugal was -1,4, in italy -1,7, Greece -3,9, spain -1,2, croatia -0,9, in contrast with latvia 4,2, lithuania 3,3, uK 1,7, estonia 1,6, Germany 0,1.
to achieve a balanced budget and reduce debts, governments have implemented a policy of austerity neglecting the diversity of sectoral structures.the weak and negative growth rates point to the fundamental problem -the structure of the eurozone.Due to different economy structure, countries have followed different paths to austerity.
Whole adjustment program has been bad for weaker countries, which already facing with the downturn in the economy.Finally, the impact of austerity has been exacerbated and did not solve the problem with the deficit.

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Romina Pržiklas Družeta, Marinko Škare Fiscal austerity Policy imPact on WelFare For example, in 2013 Portugal reached deficit of -4,9%, Greece -12,2%, spain -6,8, croatia -5,2%.it is worth noticing that countries like the uK also had a high deficit, but also positive GDP growth rate (because of the different structure of deficit and deficit financing).
in contrary countries like Portugal, italy, Greece, spain, croatia, in the period of 2009-2013) had a negative GDP growth rate and decreasing trend in investments.
it can be concluded that the reduction of capital expenditure especially during the recession it is not a solution for sustainable growth.
Further, in the same period 2009-2013 because of politics of austerity, final consumption expenditure of general government decreased in all countries, while final consumption expenditure of households and nonprofit institutions just in few countries like; lithuania, estonia, Germany.

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Romina Pržiklas Družeta, Marinko Škare Fiscal austerity Policy imPact on WelFare shortly, the share of final consumption expenditure in general government decreased, and it can be seen dramatically decline in investment, due to it is very interesting that export it has not been decreased.
it can be concluded that mechanism which links the balance of payment and government budget indicates a lack of tax revenue of public sector, which is offset mostly by borrowing abroad.namely, the problem with the current deficit cannot be solved only by cutting the state expenditures and especially capital investment.

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Romina Pržiklas Družeta, Marinko Škare Fiscal austerity Policy imPact on WelFare the percentage of unemployment youth rate were even bigger.For example, in 2013 the highest unemployment youth rate was in Greece with 58,4%, spain 57,2%, and croatia 51,5%.
other countries, with better financing and economic performance had a better result in employment and poverty also.
Finally, the progression on unemployment in the eu in the previous year has been remarkable and economic and social cost of fiscal adjustment has been very high.
the data analysis points to the problem of the structure of the eurozone (significant variation in economy between the eu member states have followed a different path to austerity) and supporting the hypothesis that with eliminating the welfare state, we cannot achieve sustainable long time growth and decrease the deficit.

CONCLUSION
in most eu countries with shattered economy, with government debt still high and exceeding the threshold value of 60 percent of GDP, the big challenge in the future will be sustainable fiscal consolidation which supports long-term growth and employment as welfare state determinants.
Despite the ongoing debate and numerous studies, there is a lack of empirical investigation on the defining the methodology of austerity, especially in the social context.Due to no consensus about the implementation of fiscal austerity has been achieved.therefore, until know, we do not have an answer to the questions when austerity is beneficial?alternatively, "should governments apply austerity despite their weak economies and diversity"? the findings of these paper indicate that the important causes of deterioration of fiscal sustainability are neglecting the problem of diversity (structure of the eurozone) and social implications for welfare.the main conclusion is that the emphasis should be placed on defining austerity methodology which will implement economic and social context.
the outcome of current research can serve as the basis for future research on the role of austerity in economic policy.

Table 1 .: theoretical studies on Fiscal austerity
Source: authors' review of the literature

Table 2 .
: empirical studies on Fiscal austerity article seeks to compare the significance of the links between fiscal policies and economic growth in the eurozone before and after the imposition of adjustments.the results of regression could serve to accept the hypothesis that the impact of austerity policies has shrunk economic activity more than expected.
2014Bilbao-ubillos, J., Fernandez-sainz, a.i. the 2014 radulescu, m.Druica, e. using linear regression, this article presents the impact of the fiscal and monetary policies on attracting the foreign direct investments (FDis) in romania, based on monthly data series during 2000-2010.Fiscal factors (mainly direct taxes) seem to play a