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.

Governments implementing austerity measures will likely use three types of austerity measures.

1. 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.
2. Another method is referred to as the ‘Angela Merkel model’, and focuses on raising taxes while cutting down government spending.
3. The last and most preferable method, according to market advocates, is to lower taxes and lower government spending at the same time.

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.

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.

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.