ABSTRACT
Related to the question of slow growth is the problem of persistent budget deficits in Europe as well as in the United States. Slow GDP is part of the problem, as it means slow growth in tax revenue. The other side of the government budget is as big of a culprit in causing persistent deficits: in a welfare state, government spending is largely defined by entitlement programs, and entitlement spending in turn is determined by variables that are independent of economic growth. The Great Recession, which started in late 2008, made austerity a household term by hurling many of Europe's welfare states into fiscal panic. Over several years prior to the crisis, persistent deficits had built up unsustainable levels of government debt. A major problem with austerity policies is that it suppresses economic activity. When credit rating of a welfare state declines, its government is left with very few options in order to continue spending on its welfare programs.
