Austerity is a set of economic policies a government uses to cut spending or raise taxes to reduce public debt. Governments typically adopt austerity measures when their debt becomes so high that they risk being unable to pay it back. If debt spirals out of control, it can lead to financial instability, and lenders start charging higher interest rates to protect themselves. Austerity aims to restore financial stability by shrinking the debt and reassuring lenders and creditors.

For countries, austerity usually means cutting back on government services, like education, health care, or social programs, and raising taxes. The goal is to improve the country’s financial health, but it can be hard on citizens, especially those who rely on government programs.

Why Do Governments Implement Austerity?

Governments turn to austerity when their debt levels rise. They spend more than they earn in revenue, causing a budget deficit. In this situation, a government borrows money to cover its expenses. The more a country borrows, the more interest it has to pay, making it harder to meet future financial obligations.

When this happens, lenders and creditors become cautious. Lenders may raise interest rates on loans, which makes it more costly for the country to borrow money. To tackle this, governments use austerity measures to close the gap between their income (through taxes) and spending. It means cutting back on public services, increasing taxes, or both.

Key Types of Austerity Measures

There are different approaches to austerity, depending on how governments balance cutting spending with raising revenue. Here are the three main types of austerity measures:

1. Raising Taxes to Increase Revenue

One common way governments address their budget deficits is by raising taxes. They might increase income, corporate, property, or sales taxes. The idea is to generate more revenue so the government can continue to fund its services while reducing its debt.

2. Raising Taxes and Cutting Non Essential Spending

Another approach combines higher taxes with cuts to government spending. Governments look at nonessential areas where they can reduce costs while boosting revenue through taxes. This method is about finding a balance—raising enough money while lowering expenses to close the budget deficit.

3. Lowering Taxes and Cutting Spending

Some governments prefer to reduce both taxes and spending. Free-market advocates often favor this approach, arguing that lowering taxes stimulates economic growth, which can generate more revenue in the long term. At the same time, reducing government spending keeps the budget balanced.

Examples of Austerity in Action

Austerity policies aren’t just theories—they’ve been put into practice by many countries facing economic challenges. Let’s look at a few real-world examples:

Greece

Greece became one of the most notable examples of austerity after the eurozone crisis 2011. The country had been running a large budget deficit, spending far more than it collected in taxes. As a result, Greece faced a serious debt crisis. Greece put strict austerity measures in place to get bailout funds from the European Union (EU) and the International Monetary Fund (IMF).

These measures included raising taxes and cutting public spending. The government cut workers’ wages, reduced social programs, and lowered pensions. While the austerity measures helped Greece avoid defaulting on its debt, they also caused widespread social unrest and economic hardship.

United Kingdom

After the global recession 2008, the UK government introduced austerity measures to reduce its budget deficit. The policies focused on reducing public spending and raising taxes. The government protected education and healthcare from most cuts but significantly reduced other public services.

Critics argued that these austerity measures slowed the UK’s recovery from the recession. Some economists believe cutting spending during a recession can do more harm than good by reducing demand and increasing unemployment. However, supporters of austerity pointed out that the country needed to get its finances under control to avoid a more significant financial crisis.

Spain

Spain also implemented austerity measures following the 2011 eurozone crisis. The country raised taxes, including a significant increase in tobacco taxes, and reduced public services. Like in Greece, these austerity measures were met with protests, as citizens struggled with the effects of higher taxes and fewer public benefits.

Why Is Austerity Controversial?

People debate austerity a lot because, although it’s supposed to help reduce government debt, it can cause severe social and economic problems. Supporters argue that reducing government debt is essential for long-term economic stability. They believe cutting spending and raising taxes is necessary to keep the country’s finances in order.

On the flip side, opponents say that austerity can do more harm than good, especially during an economic downturn. Cutting government spending during a recession can increase unemployment and reduce demand, slowing economic recovery. When governments cut social programs, pensions, or healthcare, the most vulnerable people are often hit the hardest.

For example, during the Greek debt crisis, the harsh austerity measures led to widespread poverty, high unemployment, and political instability. Many people felt that they were being asked to pay the price for the government’s mistakes.

Pros and Cons of Austerity

Pros:

• Reduces Debt: Austerity policies help lower a government’s debt, making the country more financially stable in the long term.
• Restores Confidence: By showing that it’s taking control of its finances, a government can regain the confidence of creditors and investors, which may lead to lower borrowing costs.
• Limits Future Borrowing: Reducing spending and controlling debt now can prevent the need for excessive borrowing in the future.

Cons:

• Higher Unemployment: When governments cut spending, especially on public services, job losses often occur, increasing unemployment.
• Slows Economic Growth: Reducing government spending can slow economic growth, particularly during a recession, by reducing demand.
• Affects Low-Income Citizens the Most: Austerity measures tend to hurt those who rely on government programs, such as welfare or pensions, making it harder for low-income individuals to get by.

Austerity vs. Keynesian Economics

Austerity goes against Keynesian economics, which suggests that governments should spend more, not less, during a recession to boost the economy. Keynesian economists believe that when private spending falls, the government should step in to increase demand by spending more on infrastructure, social programs, and public services. It creates jobs and helps stabilize the economy.

On the other hand, austerity takes the opposite approach—cutting spending when the economy is already weak. Critics of austerity argue that this can worsen a recession by reducing demand and increasing unemployment.

FAQs

What is austerity?

Austerity refers to policies that reduce public spending or increase taxes to lower a country’s debt.

Why do governments use austerity?

Governments use austerity to control large budget deficits and prevent financial crises by lowering debt levels.

What are examples of austerity?

Countries like Greece, Spain, and the UK have used austerity measures, including cutting public services and raising taxes.

Does austerity help or hurt the economy?

It depends. Austerity can help reduce debt but also slow economic recovery and increase unemployment, especially during a recession.

How does austerity differ from Keynesian economics?

Austerity cuts government spending, while Keynesian economics suggests increasing government spending during recessions to boost the economy.