Table of Contents
Table of Contents

What Are Austerity Measures?

Austerity characterizes severity or sternness and describes economic measures implemented by a government to reduce public-sector debt by significantly curtailing government spending.

Key Takeaways

  • Austerity measures are implemented to reduce government spending and shrink the budget deficit.
  • Austerity policies include tax increases and government program cuts.
  • Austerity measures may result in a decline in available social services and a reduced individual disposable income.

How Austerity Measures Work

Austerity measures are considered harsh economic policies intended to reduce the government's budget deficit. These policies can include reductions in government spending and increased taxes. Austerity measures are commonly used with contractionary fiscal policy or when a government faces debt default.

When a government increases its taxes, it generates more revenue. When a government reduces its spending, it has more money to pay down its debt. Austerity can be contentious for political and economic reasons. Though austerity measures can control a government's budget, they impact the day-to-day life of citizens.

The global economic downturn that began in 2008 left many governments with reduced tax revenues and exposed what some believed were unsustainable spending levels. Several European countries, including the United Kingdom, Greece, and Spain, turned to austerity to alleviate budget concerns.

Types of Austerity Measures

A government that implements austerity measures?is willing to take steps to bring financial health back to their budgets. Reducing government spending can take on many forms and commonly includes cuts in government programs or changes to tax policies, including:

  • Limit unemployment benefits
  • Extend the eligibility age for retirement and health care benefits
  • Freeze or reduce government employees' wages
  • Decrease funding for social or welfare programs
  • Increase income taxes
  • Lower the minimum wage

Examples of Austerity Measures

During the Great Depression in the 1920s, the United States implemented austerity measures to address unemployment that jumped from 4% to 12%, and the 17% decline in the gross national product (GNP).President Harding cut spending from $6.4 billion in 1920 to $3.3 billion in 1922.

Austerity measures were taken in Greece in 2013 during its debt crisis. Greece's economic problems started during the 2008-2009 financial crisis, threatening default on debt payments to the European Union (EU). Greece suffered from the Great Recession, with an unemployment rate increase from 7.7% in 2008 to 28.3% in 2013. After measures were implemented, which included a tax structure overall, the unemployment rate decreased and stood at 11.5% in September 2023.

290 billion Euros ($330 billion)

The amount the EU and the IMF loaned Greece as a bailout to prevent it from defaulting on its debt.

Do Austerity Measures Work?

While the goal of austerity measures is to reduce government debt, their effectiveness remains a matter of debate. Supporters argue that massive deficits can suffocate the broader economy, limiting tax revenue. Opponents believe government programs are the only way to replenish for reduced personal consumption during a recession.

What Are the Effects of Austerity Measures?

Depending on the austerity measures implemented, the effects can vary. Cuts in government spending and tax increases bring in more revenue for the government, allowing it to pay down debt, but often harshly affect citizens. Measures curtail programs that benefit society, such as healthcare services, aid to veterans, and environmental improvements. Less money in the pockets of citizens reduces consumer spending, resulting in a contraction of economic growth.

When Are Austerity Measures Commonly Implemented?

Austerity measures are primarily implemented when a government is about to default on its debt.

The Bottom Line

Austerity measures are severe policies enacted to improve the financial health of the government. Though they help the balance sheet, measures often harshly impact citizens. How and when they are implemented and who they directly impact are matters of consideration in determining whether or not the measures improve the economy and society.

Article Sources
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  1. Mises Institute. "The Forgotten Depression of 1920."

  2. Foundation for Economic Education. "The Depression You've Never Heard Of: 1920-1921."

  3. International Monetary Fund. "Greece: Letter of Intent, Memorandum of Economic Financial Policies, and Technical Memorandum of Understanding," Page 8.

  4. FRED Economic Data. "Unemployment Rate: Aged 15-64: All Persons for Greece."

  5. Council on Foreign Relations. "Greece's Debt."

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