Neo-liberalism and/or the Austrian school of economics call for austerity when a nation has too much debt compared to its GDP. The ECB imposed austerity on Greece and the other PIGS during the 2008 economic crisis. Their ratio of debt to GDP actually went up because their GDP went down and so did their tax revenues.
Why does this happen.
There are basically 4 things a nation can tax.
. . 1] Heads – everyone pays a fixed amount. This might also include Hearth taxes, every house or hut pays a fixed amount.
. . 2] Land and buildings (= property) – you pay a percentage of the value of what you own. This might also include factories (= buildings) and the machines in them. Some nations have wealth taxes on really rich people, the UK does, I'm told.
. . 3] Consumption – you pay a percentage of the value of what you spend on consumer goods (not land and industrial machines). A sales or VAT tax.
. . 4] Income – you pay a percentage of your income, usually nothing if you make a little, something if you make more, and a higher and higher perentage of your income as you make more and more.
Most modern nations mostly tax consumption and income. The head tax is a thing of the past and in the US property taxes are only used by state and local govs.
This means that as the economy slows and incomes and spending drops, tax revenues of the nation also drops. This makes it hard to balance the budget by cutting spending, because when spending is cut, this cuts the incomes of some people. They then spend less. This cuts the incomes of more people. If the nation is taxing consumption with a VAT tax or a sales tax, then tax revenues fall as spending falls. If the nation is taxing incomes then tax revenues fall as incomes fall.
This results in the deficit going up compared to what might have been expected, unless Gov. spending is cut more. This also results in the GDP going down.
Therefore, in the ratio of debt / GDP, the numerator = amount of debt goes down less than expected AND the denominator goes down as might be expected. When you do the math the smaller denomitator makes the ratio go up, not down.
Now, if the nation relies on Property taxes and wealth taxes and these are not quickly reduced as the value of the property falls in the recession then the tax revenues will not fall. This also goes for net worth taxes on wealth (stacks, bonds, and cash in a bank, etc.).
. . However, the rich don't like wealth taxes because they are the only ones who pay them. The rich want to shift the tax burden onto the middle class and the poor as much as possible. However, this then makes austerity fail to do what the Neo-liberals say it will do.
On a similar note – paying down the national debt can only be done if the taxes used to do it fall mostly on the rich. This means the percentage raised from the rich must be at least as much as the percentage of wealth and income as the rich have compared to everyone else. It may even need to be more than this percentage.
. . This is because taxing the middle class and poor will cut their spending and this will start a recession in a few years. The recession will keep getting worse until the Gov. increases spending and ends the surplus. If the Gov. continues the surplus there will be massive public anger and this will lead to a new Gov. or civic unrest.
. . The rich would hate this tax system so it will never happen. All calls by economists to pay down (or pay off) the national debt are really just the rich asking for less social spending to help the poor and middle classes. And they want support the Gov. with taxes on the poor and middle classes. It is just the rich taking from the rest of the nation using the Gov. to do it for them.
. . The rich don't understand that their incomes will fall or at least not rise as much if everyone else is made poorer.