A:

Austerity measures are attempts to significantly curtail government spending in an effort to control public-sector debt, particularly when a nation is in jeopardy of defaulting on its bonds.

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, have turned to austerity as a way to alleviate budget concerns. As a result, their budget deficits skyrocketed. Austerity became almost imperative in Europe, where eurozone members don't have the ability to address mounting debts by printing their own currency. As their default risk increased, creditors put pressure on these countries to aggressively tackle spending.

While the goal of austerity measures is to reduce government debt, their effectiveness remains a matter of sharp debate. Supporters argue that massive deficits can suffocate the broader economy, thereby limiting tax revenue. However, opponents believe that government programs are the only way to make up for reduced personal consumption during a recession. Robust public sector spending, they suggest, reduces unemployment and therefore increases the number of income-tax payers.

Austerity can be contentious for political, as well as economic, reasons. Popular targets for spending cuts include pensions for government workers, welfare and government-sponsored healthcare, programs that disproportionately affect low-income earners at a time when they're financially vulnerable.

RELATED FAQS
  1. What is the role of deficit spending in fiscal policy?

    Read about the role deficit spending can play in a government's fiscal policy, and learn why economists are torn about the ... Read Answer >>
  2. What is the effect of a fiscal deficit on the economy?

    Take a deeper look into the real impacts of government budget deficits on the economy, and why government financing reduces ... Read Answer >>
  3. How do debt issues affect governments' abilities to run fiscal deficits?

    Read about whether or not debt issues affect the federal government's ability to run fiscal deficits, and find out what those ... Read Answer >>
  4. What are the long-term economic effects of a negative current account?

    Learn why a nation's negative current account isn't a reliable indicator of positive or negative long- term economic effects ... Read Answer >>
  5. Who thinks fiscal deficits are a good idea?

    Find out why nearly all political actors support the concept of governments incurring fiscal deficits, either explicitly ... Read Answer >>
Related Articles
  1. Insights

    Austerity: When The Government Tightens Its Belt

    When a government tightens its belt in tough economic times the entire nation feels the squeeze.
  2. Insights

    Is David Cameron's Austerity Working for Britain?

    Although growth picked up in 2013 and 2014, contrary to Chancellor of the Exchequer George Osborne’s claims, austerity is not working for Britain.
  3. Insights

    Is A Greek Euro Exit Finally About To Happen?

    The Eurozone crisis involving Greece has been a nagging thorn in the side of the European Union ever since the financial collapse of 2008–2009.
  4. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
  5. Insights

    How Debt Limits A Country's Options

    While debt is fundamentally necessary to the operation of a national government, it can also be limiting and dangerous.
  6. Personal Finance

    7 Austerity Measures For Your Personal Budget

    Many European countries are implementing tough austerity measures to curb their spending. Find out how you can do the same to your household budget.
  7. Investing

    Will Spain Exit the Euro?

    With a "no" vote in last Sunday’s referendum on whether the Greek people would accept imposed austerity measures, chances of a Greek exit from the euro have substantially increased. Will Spain ...
  8. Insights

    6 Factors That Point to Global Recession in 2016

    We may be on the verge of another global recession.
  9. Insights

    Why and When Do Countries Default?

    Countries can default on their debt. This happens when the government is either unable or unwilling to make good on its fiscal promises.
  10. Managing Wealth

    How to Break Your Bad Financial Habits

    For individuals and families to hold their own and build equity for retirement, they need to commit to responsible spending and borrowing.
RELATED TERMS
  1. Austerity

    A state of reduced spending and increased frugality. Austerity ...
  2. European Sovereign Debt Crisis

    During the European debt crisis several countries in the eurozone ...
  3. Sprexit

    Sprexit, or SPanish euRo exit, is the possible case of Spain ...
  4. Budget Deficit

    A status of financial health in which expenditures exceed revenue. ...
  5. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
  6. Limited Government

    A political system in which legalized force is restricted through ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center