What does austerity mean?
Governments use austerity measures as a way of reducing their debt. Austerity serves as a stabiliser that can both slow economic growth and help avoid a debt crisis. However, governments don’t usually turn to austerity unless forced to do so, as it can have a major impact on a country’s economy. On this page, you’ll learn everything you need to know about austerity and how it has affected the UK economy.
- Debt control: Austerity is a set of economic policies implemented by a government to control public sector debt
- Measures: Austerity measures include a reduction in government spending, an increase in tax revenues, or both, to reduce the budget deficit and avoid a debt crisis
- UK austerity: The UK government implemented austerity measures following the financial crisis in 2008. These measures included eliminating over 490,000 government jobs, cutting the budget and reducing income tax allowance for pensioners
What's on this page
What's on this page
What is austerity?
By definition, austerity is a set of economic policies a government imposes to control public sector debt. Governments usually implement austerity measures when this debt is so large that the risk of being unable to make repayments is a real possibility.
The chart below shows the UK government’s net borrowing since 2000. As you can see, the austerity measures implemented following the financial crash in 2008 helped to keep borrowing under control. The chart also shows how government spending surged to record highs in 2020/21 following the coronavirus pandemic. Contemporary discussions around austerity in the UK sometimes refer to ‘a decade of austerity’, which includes the first austerity period of 2010 to 2019 (ending due to a period of interventionist spending during 2020) and the second period of austerity which began in 2021 (to present).
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How does austerity work?
Governments implementing austerity measures will likely use three types of austerity measures.
- The first measure is to impose higher taxes, which helps to support more government spending. The goal of this austerity measure is to stimulate growth with spending through taxation.
- Another method is referred to as the ‘Angela Merkel model’, and focuses on raising taxes while cutting down government spending.
- The last and most preferable method, according to market advocates, is to lower taxes and lower government spending at the same time.
What happened during austerity in the UK?
Between 2010 and 2019 alone, more than £30 billion in spending cuts were made to welfare payments, housing subsidies and social services. Since 2010, we saw:
- Child poverty: the number of children in poverty increased by 600,000 between 2012-2019.
- Food banks: 40,989 people used Trussell Trust emergency food banks in 2009/10 – this increased to under 3 million (2,986,203) in 2022/23
- Homelessness: the ONS estimated that 597 homeless people died in England and Wales in 2017, an increase of 24% since 2012
- Policing: Between 2010 and 2019, the number of police officers employed in England and Wales was reduced by approximately 20,000
- Healthcare: A 2017 BMJ Open study linked austerity to 120,000 extra deaths in England, primarily as a result of a reduction in the number of nurses.
- Libraries: Almost 800 public libraries closed
- Government jobs: More than 490,000 goverment jobs axed
- Retirement age: The retirement age increased from 65 to 66 in 2020
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What are examples of austerity measures around the world?
The following are examples of austerity measures that different countries have undertaken in a bid to reduce the national debt:
- Greece: Greece implemented austerity measures to target tax reform in response to the debt crisis that began in 2008. Lenders to the country required Greece to reorganise its revenue collection agency to track tax evasion closely. This agency targeted high-wealth and self-employed individuals for audit. Other measures required Greece to reduce government employment by 150,000, lower public employee wages by 17% and eliminate the heating fuel subsidy.
- European Union: The debt crisis in Greece led to a Eurozone crisis because many European banks had invested in Greek businesses and sovereign debt. Due to the 2008 financial crisis, they needed to bailout (the act of giving financial assistance to a failing business or economy to save it from collapse) to avoid defaulting on their sovereign debt.
- Italy: Austerity measures in Italy began in 2011, when then-Prime Minister, Silvio Berlusconi, increased healthcare costs. He also cut subsidies for regional governments, family tax benefits and pensions for the wealthy, which led to people voting him out of office. Mario Monti replaced Silvio Berlusconi and raised tax burdens on the wealthy, increased the pension age and pursued tax evaders.
- Ireland: Austerity measures in Ireland also began in 2011, when the Irish government cut employees’ salaries by 5%, reduced welfare, cut child benefits and closed police stations.
- Portugal: In Portugal, government austerity measures included cutting wages by 5% for top government employees, raising VAT by 1% and increasing taxes on the wealthy. The Portuguese government also cut military and infrastructure spending.
Does everyone have to pay taxes? The simple answer to this question is “yes”, unless you’re a low earner. The most common way to pay tax is as income tax on your salary. You might also be taxed on other forms of income; find out more in this guide.Read more
Knowing your retirement age is important, because you can use it as a target for when you can stop working. Find out the current retirement age in the UK, how to claim your state pension and ways you can save for your retirement.Read more
How is austerity implemented?
The implementation of austerity measures depends on the government. If a government thinks its debt level will increase to the point where it may not meet its repayments. It will probably consider austerity measures like the three mentioned above: raising taxes, both raising taxes and reducing spending, and reducing taxation and government spending.
In most cases, austerity measures are implemented following a financial crisis, just as the financial crisis of 2008 forced many countries to go into austerity.
What are the risks of austerity?
The goal of austerity is to reduce government debt. Still, many people debate this measure’s effectiveness, arguing that a massive deficit can have a greater impact on the economy.
Opponents of austerity believe that government programs are the only way to make up for reduced personal consumption during a recession. John Maynard Keynes, a revolutionary British economist, believed that the government’s role was to increase spending during a recession to replace falling demand. His logic was that if the government does not meet demand, unemployment will rise, prolonging a recession.
In an economic downturn, falling income reduces the amount of tax a government can generate. In the same way, a government boosts tax revenue during an economic boom. The irony of this is that public expenses, such as employment benefits, are needed much more during a recession than an economic boom.
What is the effect of austerity on tax?
Most economists and policy analysts agree that raising tax increases a government’s revenue. Many European countries raised taxes under austerity measures, such as Greece, which increased VAT to 23% in 2010 and imposed an additional 10% tariff on imported cars. The UK later followed suit, increasing the standard rate of VAT from 17.5% to 20% in January 2011.
How has austerity affected the UK?
Austerity in the UK began in 2010 as a government response to the crippling economic downturn that followed the 2008 financial crisis. Austerity measures were imposed as a way of eliminating the budget deficit.
Many reports claim that the effects of austerity in the UK have led to increased levels of poverty and unemployment. According to the United Nations, the government has announced more than £30 billion in cuts to welfare payments, housing and social services since 2010. The British government cut over 200,000 public sector jobs in 2011, with people of colour, particularly women, being disproportionately impacted by job cuts because they are more likely to be employed in low-paying, public sector jobs or unsecured work.
Although the British government has disputed these findings, demand for food banks has almost doubled, and some families receiving benefits are now thousands of pounds worse off. Some research has even suggested that the crime rate has also increased because of cutbacks to the police force. Meanwhile, local spending cuts have forced many libraries and museums to scale back their services, with around 800 libraries thought to have now closed completely since austerity measures were introduced in 2010.
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