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.

What is Austerity?What is Austerity?What is Austerity?
The rundown
  • Austerity is a set of economic policies implemented by a government to control public sector debt
  • 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
  • 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 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 1993. As you can see, the austerity measures implemented following the financial crash in 2008 have helped reduce the rate of borrowing.

How does austerity work?

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. 

What are examples of austerity measures?

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.
  • United Kingdom: In the UK, the government cut more than 490,000 government jobs, reduced the budget by 19%, increased the retirement age from 65 to 66 in 2020, cut income tax allowance for pensioners and reduced child benefits.

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.

How has austerity affected the UK?

A crippling downturn for the economy, austerity in the UK began in 2010 as a government response to the 2008 financial crisis. Austerity measures were imposed as a way of eliminating the budget deficit. 

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

In 2018, then-British Prime Minister, Theresa May, announced her intention to end austerity in the UK once the country left the EU after Brexit in 2019. While austerity measures have eased, delays to Brexit and the global pandemic have both impeded a true end to austerity. 

HomeFinance Glossary › Austerity

Get the inside scoop

Want to be in-the-know on all things savings?
Of course you do. Sign up and be the first to find out about top rates as soon as they land,
exclusive account holder-only offers, and the latest money news.