What is Austerity?
MA, Sociology (Freie Universität Berlin)
Date Published: 05.08.2024,
Last Updated: 06.08.2024
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Defining austerity
Austerity refers to the cutting of public expenditures—such as in the realms of education, healthcare, infrastructure, and social services—in order to improve a country’s economic standing. Austerity can also include the raising of taxes to increase the amount of revenue that the government receives. These policies are often implemented with the aim of reducing deficits, redirecting more money to pay back debts, or a combination of the two. As Suzanne J. Konzelmann points out in Austerity (2019),
especially since the 2008 financial crisis – austerity has been used to describe government deficit reduction policies involving spending cuts (and sometimes tax increases). However, it has also been used for political and ideological reasons (stated or not), as a means of reducing the size and economic role of the state, particularly with respect to social welfare provision.
Suzanne J. Konzelmann
especially since the 2008 financial crisis – austerity has been used to describe government deficit reduction policies involving spending cuts (and sometimes tax increases). However, it has also been used for political and ideological reasons (stated or not), as a means of reducing the size and economic role of the state, particularly with respect to social welfare provision.
The term is often associated with the policy response of many countries during the Great Recession that began in 2008 as a way to manage the economic downturn. Austerity policies have, however, existed long before this—particularly in the global South. As Konzelmann alludes in the previous quote, austerity has both economic and political justifications—and the two camps are not always aligned. Furthermore, its proponents generally belong to a more conservative political orientation, while its opponents are those who are those who are critical of capitalism more broadly.
Though austerity has been argued by some economists and politicians as a rational and necessary way to resolve economic deficits and pay back debts, it is a controversial approach. In this study guide, we will cover the theory and logic behind austerity. Then we will look at some case studies where austerity has been implemented to understand its impacts in practice. Following that, we will close with some critical reflections on austerity in order to gauge how it is viewed by economists today.
Theory and rationale behind austerity
To begin with, it’s important to understand the logic behind austerity and the justifications for implementation around the world. To do so, let’s begin with an analogy. Imagine that a family is going into debt by spending more than they earn. Perhaps they have even taken out interest-bearing loans in order to pay for their mortgage and other bills related to their children’s education and their elderly relative’s healthcare. At some point, the family must repay the debt to avoid penalties and accruing more interest on what they already owe. They might do this by cutting back their expenditures to redirect more of the household budget toward paying back their loans.
This is the basic rationale behind austerity, except it is applied on a national scale. When a country spends beyond its means on public expenditures, it has a deficit. The situation can be caused or exacerbated by economic downturns such as the Great Recession. In cases where the country has borrowed money in the form of loans—either from other countries, firms, or organizations like the International Monetary Fund (IMF)—it goes into debt, which it must pay back. This is necessary to maintain economic stability, investment credibility, and long-term growth.
As argued in Austerity: When It Works and When It Doesn't (2019),
periods of austerity are relatively common, for two reasons. First, [...] deficits oſten accumulate even when the economy is growing and the deficits produced during recessions are not compensated for by surpluses during booms. As a result, many countries have accumulated large public debts even in perfectly “normal” times. [...] The second reason why austerity may be needed is that sometimes exceptionally large amounts of government spending (for example, because of a war or a major disaster), perhaps even larger than anticipated, create so much debt that it cannot be reduced simply with economic growth. (Alberto Alesina, Carlo Favero, and Francesco Giavazzi)
Alberto Alesina, Carlo Favero, and Francesco Giavazzi
periods of austerity are relatively common, for two reasons. First, [...] deficits oſten accumulate even when the economy is growing and the deficits produced during recessions are not compensated for by surpluses during booms. As a result, many countries have accumulated large public debts even in perfectly “normal” times. [...] The second reason why austerity may be needed is that sometimes exceptionally large amounts of government spending (for example, because of a war or a major disaster), perhaps even larger than anticipated, create so much debt that it cannot be reduced simply with economic growth. (Alberto Alesina, Carlo Favero, and Francesco Giavazzi)
In such cases as those described above, austerity can be employed to free up more money to ameliorate these economic pressures.
This results in cutting funds allocated to a wide array of public projects and services, ranging from healthcare and education to infrastructure and publicly subsidized utilities like electricity and water. Oftentimes, this creates a gap in meeting these needs, which is then filled by profit-oriented private firms who provide these services for a fee when they might have been free when offered by the government. The rationale behind austerity, then, is that this can help stimulate the economy by creating new opportunities for growth in the private sector. In practice, however, austerity can also have disastrous effects on the public—including on their consumption power and on the labor force—which ultimately leads to more economic instability, unemployment, and poverty.
Austerity in practice
Thus far, we’ve covered the logical justifications behind austerity and how it is supposed to work to improve a country’s economic outlook—at least in theory. In this section, we will explore three real-world examples of austerity in Canada, Argentina, and Greece.
Austerity in Canada
Canada during the 1990s is frequently cited as a successful example of austerity. Alesina, Favero, and Giavazzi, for instance, point out that during this time, Canada was experiencing high levels of debt at more than 80% and a budget deficit of 8% GDP (2019). As a response, it implemented waves of reforms including the Expenditure Control Acts and other spending cuts. Therefore,
In 1994, the new government announced many spending cuts, to be implemented in the following 3 years and to be reviewed in 1995. Business subsidies were cut by about 60% and public employment reduced by 15% over a period of 4 years. Transfers from the federal government to the provinces also were cut. (Alesina, Favero, and Giavazzi, 2019)
As a result, Canada mitigated its deficit, which some economists argue led to economic growth:
A policy package of large cuts in government spending, accompanied by an accommodating monetary policy and structural reforms, was expansionary. The growth rate of output per capita remained positive throughout, rising from 1.5% in 1993 to 3.4% in 1994, then slowing in 1995–6 and increasing again to 3.2% in 1997. The debt over GDP ratio peaked to just above 100% in 1996, then started to decrease. (Alesina, Favero, and Giavazzi, 2019)
While austerity policies may have met their stated aims, others argue that it simply transferred the debt from the national to the municipal governments and onto individuals. As Heather Whiteside asserts in her chapter “BC’s Recurrent Austerity: Victory Unfettered from Success,”
Austerity initiatives over the past thirty years have fundamentally restructured state–society relations and have shifted (privatized, downloaded) risk, responsibilities, and burdens onto the shoulders of groups and individuals that were seldom, if ever, the agents responsible for provincial budget woes. (The Public Sector in an Age of Austerity, 2018)
Bryan M. Evans and Carlo Fanelli
Austerity initiatives over the past thirty years have fundamentally restructured state–society relations and have shifted (privatized, downloaded) risk, responsibilities, and burdens onto the shoulders of groups and individuals that were seldom, if ever, the agents responsible for provincial budget woes. (The Public Sector in an Age of Austerity, 2018)
Thus, while austerity in Canada's case might have achieved the kind of numerical success highlighted by Alesina, Favero, and Giavazzi, it does not necessarily convey the full picture. Furthermore, in the long term, austerity policies in Canada over the last 30 years have also played into trends like the shrinking of public healthcare infrastructure (such as the closing of hospitals) to produce issues experienced by many Canadians today (For more on how austerity policy has impacted contemporary Canada, check out the book, The Changing Politics and Policy of Austerity by Stephen McBride, Bryan Evans, and Dieter Plehwe, [2021]).
Austerity in the global South
While much of the contemporary discourse on austerity tends to focus on infamous cases like the Eurozone during the Great Recession—which we will explore later—it has a long history in the global South, where it is more commonly referred to as structural adjustment. Particularly as globalization began to take place at the end of the 20th century, many countries in the global South faced economic crises, due to factors like oil-price shocks and interest rate spikes in the 1970s and 80s.
These events took place as many economies transitioned towards neoliberalism. (For more context, check out our study guide, “What is neoliberalism?”)
Institutions like the IMF recommended taking out loans to aid in economic development in the face of such pressures. In actuality, these loans themselves came at a high cost to the public. Namely, in order for the IMF to approve loans, the country had to implement structural adjustment programs that led to cuts in public funding for things like education, healthcare, and pensions. Austerity policies also involved decreasing subsidies and increasing taxes. These methods were seen as assurances that countries would be able to ascertain the funds necessary to pay back the loans issued to them.
Argentina and the crisis of 2001
One notorious example of the disadvantages of implementing IMF austerity policies was in Argentina. Once considered an economic success story for implementing IMF austerity policy recommendations that resulted in short-term economic gains in the 1990s,
Argentina was hailed by the IMF as the poster child of the economic adjustment policies [...] These included fiscal tightening, mass privatizations and the liberalization of trade and capital flows, which were promoted with great gusto by the agents of neoliberalism. By the middle of the decade, President Carlos Menem’s government could boast that it had impressively brought hyperinflation (that had reached 4,900 percent in 1989) under control and had secured strong, consistent growth. (Daniel Ozarow, Cara Levey, and Christopher Wylde, "Introduction," Argentina Since the 2001 Crisis, 2014)
Edited by Cara Levey, Daniel Ozarow, and Christopher Wylde
Argentina was hailed by the IMF as the poster child of the economic adjustment policies [...] These included fiscal tightening, mass privatizations and the liberalization of trade and capital flows, which were promoted with great gusto by the agents of neoliberalism. By the middle of the decade, President Carlos Menem’s government could boast that it had impressively brought hyperinflation (that had reached 4,900 percent in 1989) under control and had secured strong, consistent growth. (Daniel Ozarow, Cara Levey, and Christopher Wylde, "Introduction," Argentina Since the 2001 Crisis, 2014)
Yet, within a few years, Argentina became increasingly reliant on foreign capital investments and had accumulated a high level of debt. The fact that Argentina’s currency was bound to the US dollar, another one of the IMF’s recommendations, further contributed to its economic problems. When Argentina was hit with a recession in 2001, it laid bare the instability of these policies and led to a staggering economic crisis as well as profound social unrest.
In the midst of all this, Argentina turned to the IMF for a loan in an attempt to stabilize the situation and secure more funds. Argentina's president at the time, President De la Rúa, also implemented harsh measures on the public in an effort to maintain order, including declaring a state of emergency and freezing citizens’ bank accounts to avoid capital flight. This backfired by plunging the country further into social and political crisis:
In the space of one month, the country saw four presidents come and go, the largest debt default in international history (at the time), the abandonment of the ten-year-old currency exchange regime (and subsequent devaluation of the peso), which had formed the contractual basis of the entire Argentine economy since it was introduced in 1991, a general strike, major lootings, as well as the Corralito—a government decree that froze savers’ deposits in order to prevent capital flight and a run on the banks. (Ozarow, Levey, and Wylde, 2014)
The measures taken against the people in an effort to force them to comply with the austerity measures imposed on them led to widespread riots that extended across broad factions of Argentinian society. In the longer term, Argentina’s economy has remained volatile, as austerity policies weakened the country’s economic resilience. The effects of this have continued to reverberate in successive economic, social, and political crises afflicting the country today.
(To learn more about the unequal economic dynamics between the global North and the global South, read our study guide on world-systems theory.)
Austerity and the Great Recession
The term austerity was most recently popularized in political discourse in relation to the Great Recession of 2008. This is the case so much so that Konzelmann orients the reader by opening her book Austerity with the following points,
Austerity has become a widely used term in economic policymaking circles, academic research, and the popular media, since concerns were raised about high levels of Greek sovereign debt following the 2008 financial crisis. In 2010, it was named Word of the Year by the Merriam-Webster Dictionary, after a surge of more than 250,000 searches for the term on its website. (2019)
In this case, austerity was presented as an unfortunate but necessary and rational response to the financial crisis that was plaguing the European Union (EU) at the time. While the effects of these policies were certainly not limited to the case of Greece—with Spain, Italy, the UK, and Portugal also being notable examples—it is perhaps the most dramatic example of austerity’s impacts on EU member states.
Debt crisis and austerity in Greece
When the 2008 financial crisis hit, it laid bare Greece’s severe debt crisis. For years, it had been accruing debts from various lenders including other EU member states, the IMF, and via private investors who had previously bought up government bonds. The country also had a large deficit due to public expenditures which surpassed the country’s actual GDP. This created a perfect storm when the recession occurred. The country implemented stringent austerity measures in order to ameliorate the numerous perils facing the economy—particularly as they were pushed to borrow more money in the short term to address the discrepancies in revenue resulting from the financial crisis. As summarized in the CIA World Factbook 2022-2023,
Under intense pressure from the EU and international market participants, the [Greek] government accepted a bailout program that called on Athens to cut government spending, decrease tax evasion, overhaul the civil-service, health-care, and pension systems, and reform the labor and product markets. (2022)
Central Intelligence Agency
Under intense pressure from the EU and international market participants, the [Greek] government accepted a bailout program that called on Athens to cut government spending, decrease tax evasion, overhaul the civil-service, health-care, and pension systems, and reform the labor and product markets. (2022)
While these austerity policies seemed to mitigate Greece’s deficit by 1.3% within a few years and result in a 0.7% growth in GDP, as cited in CIA World Factbook, it continued to accumulate more debt in order to do so, at what former Greek finance minister, Yanis Varoufakis, calls “usurious rates” in his book The Global Minotaur. Continuing with The CIA World Factbook,
In April 2010, a leading credit agency assigned Greek debt its lowest possible credit rating, and in May 2010, the IMF and euro-zone governments provided Greece emergency short- and medium-term loans worth $147 billion so that the country could make debt repayments to creditors. (2022)
In addition to the vicious circle of debt that countries subjected to austerity measures tend to find themselves in, the Greek population also experienced notoriously punishing levels of decline in quality of life under austerity. As argued in Living Under Austerity,
One evident result had been the deterioration of the living standards of people in Greece, an expected outcome of course considering the prolonged recession that removed nearly a quarter of the precrisis GDP of Greece, the collapse of employment especially in the private sector, and cuts in social services across the board. This deterioration, however, has not been uniform; because of the structure of the Greek economy and the Greek welfare state the effects of the deterioration have had a particularly deleterious effect on women, immigrants, and the young. (“Conclusion,” Aimee Placas and Evdoxios Doxiadis, 2018)
Edited by Aimee Placas and Evdoxios Doxiadis
One evident result had been the deterioration of the living standards of people in Greece, an expected outcome of course considering the prolonged recession that removed nearly a quarter of the precrisis GDP of Greece, the collapse of employment especially in the private sector, and cuts in social services across the board. This deterioration, however, has not been uniform; because of the structure of the Greek economy and the Greek welfare state the effects of the deterioration have had a particularly deleterious effect on women, immigrants, and the young. (“Conclusion,” Aimee Placas and Evdoxios Doxiadis, 2018)
In addition to the conditions outlined above, austerity also led to a major rise in unemployment and civil unrest in Greece, as many of the austerity policy reforms purported to improve the country’s financial standing proved too untenable and politically unpopular to pass, which has enabled gains of political currents on both extremes of the political spectrum.
Criticisms of austerity
Short-sighted economic policy
As our examples show, austerity can seem to work in the short term when it comes to reducing spending deficits, stimulating growth, or freeing up funds to repay debts. On paper, it may appear that austerity does work to achieve its stated objectives of improving a country’s economic outlook. As Varoufakis argues, however, the picture is not that simple. Rather,
In a never-ending circle, the imposed austerity worsens the recession afflicting these deficit states, and thus inflames the bankers’ already grave doubts about whether they will ever be paid back by Greece, Ireland, etc. And so the crisis reproduces itself. (The Global Minotaur, 2015)
Yanis Varoufakis
In a never-ending circle, the imposed austerity worsens the recession afflicting these deficit states, and thus inflames the bankers’ already grave doubts about whether they will ever be paid back by Greece, Ireland, etc. And so the crisis reproduces itself. (The Global Minotaur, 2015)
Thus, instead of restoring investor confidence and ameliorating crisis, austerity tends to backfire by ostensibly mitigating one crisis by producing new ones:
Budget deficits grow, austerity causes more banking anxiety as it speeds the shrinkage of the deficit economies, and, in a vicious feedback effect, this parallel drama dislodges the next ‘marginal’ country from the cliff face. (Varoufakis, 2015)
Moreover, even when seemingly effective in cases such as Canada, austerity does not simply make the debt disappear but downgrades it onto municipal governments, along with individuals who lose access to affordable public services—producing new crises in other areas of politics and society as well. Finally, while austerity may work to an extent in times when the crisis is less severe, the more severe the crisis the more likely that a country will wind up in this never-ending cycle.
Ignoring the social and political impacts
The political unpopularity of austerity reforms typically makes them untenable to implement long enough for them to work in improving a country’s economic standing—as we have seen in the cases of Greece and Argentina. The impacts of austerity reverberate far beyond the realm of economics, as cutting public spending usually results in the loss of public sector jobs, which increases unemployment. It also means that services that were once public provisions and paid for via tax dollars are privatized, meaning that households now have to incur additional expenses to access healthcare, education, utilities and more. In many cases, this can also increase poverty by raising the cost of living.
As scholars like Nancy Fraser point out, these social crises ushered in by austerity play a role in producing political crises,
Having orchestrated sovereign debt crises, central banks and global financial institutions compelled states under assault by bond markets to institute “austerity,” which meant serving up their citizens on a platter for cannibalization by international lenders. The European Union, once considered the avatar of “postnational democracy,” rushed to do the bidding of the bankers and investors, forfeiting its claim to democratic legitimacy in the eyes of many. [...] In general, then, the present regime of accumulation has spawned a crisis of democratic governance. (Cannibal Capitalism, 2022)
Nancy Fraser
Having orchestrated sovereign debt crises, central banks and global financial institutions compelled states under assault by bond markets to institute “austerity,” which meant serving up their citizens on a platter for cannibalization by international lenders. The European Union, once considered the avatar of “postnational democracy,” rushed to do the bidding of the bankers and investors, forfeiting its claim to democratic legitimacy in the eyes of many. [...] In general, then, the present regime of accumulation has spawned a crisis of democratic governance. (Cannibal Capitalism, 2022)
Fraser argues that policies like austerity, which she regards as part of a larger neoliberal project, have betrayed the public and therefore, deteriorated the legitimacy of the political center. This has been a factor in the rise of the far right in many countries across Europe, North America, and parts of Latin America like Argentina. Thus, even if austerity were to work in the sphere of the economy, it still comes at a cost.
Keynesian critique of austerity
There is a growing critical consensus in economics that economic austerity in a time of recession ultimately exacerbates the downturn rather than stimulating stable growth in the economy. Instead, as originating with the 20th-century economist Keynes, the recommended alternative is to actually increase public spending during economic downturns in order to offset the impacts of the crisis in the private sector and on the population. Then, countries can focus on paying back their debts and taking a more economically conservative approach during times of prosperity in the boom-bust cycle of capitalist economies.
Here, one oft-cited example is the US New Deal policy program which was implemented in response to the Great Depression in the 1930s. It involved increased public spending and job creation through infrastructure development and other public works projects. In addition, this approach suggests raising taxes, particularly on the wealthy, rather than borrowing from lenders. As argued in Austerity,
The decision turned out to be the right one: as a result of the New Deal's expansionary measures, the following four years – 1933 through the fall of 1937 – saw a substantial recovery. Annual real GDP growth averaged over 9 percent; unemployment fell from 25 percent in 1933 to 14 percent; and, by the spring of 1937, production, profits, and wages had returned to their pre-crash levels. (Konzelmann, 2019)
It is worth noting that the Great Depression of the 1930s took place nearly a century ago and the political economic landscape has certainly changed, as the economy has become more globalized and complicated by processes of financialization. However, the general notion of increasing spending to stimulate economies during times of crisis, raising taxes on the wealthy to offset reliance on creditors, and so on, still serves as a counterpoint to political discourse that austerity policy is the inevitable response to a financial crisis.
Closing thoughts
Austerity is a controversial policy approach with complex political and economic dimensions. Its proponents suggest that it is a necessary and effective way to reduce spending deficits and reallocate funds to pay back debts. In turn, austerity policies—such as raising taxes and cutting public expenditures—will help stabilize the economy and maintain the financial credibility of the country that implements them. Its critics, however, argue that these gains are only short term, and are measured on narrow economic indicators like GDP. They assert that in the medium and long term, austerity makes a country’s economy more vulnerable to future crises. They also point to the resulting political and social calamities as reasons to remain skeptical of austerity policy.
In general, there is a growing consensus among economists that austerity policies should not be implemented when a country is already in a recession. Rather, it is more effective to cut public expenditures and raise taxes during times when the economy is in a growth period, as this places less burden on regional governments, local communities, and individual citizens. Others, however, still remain cautious of this approach, suggesting that it is more politically motivated than guided by good economic practice. Those who oppose austerity instead view it as part of a larger neoliberal project of restructuring and subordinating more aspects of public life to the requirements of the economy—ultimately further exacerbating inequality.
Such can also be seen in the examples of Argentina and Greece, and to some extent, Canada. While views on austerity remain divided, these practices continue to have a prevalent impact on shaping every level of contemporary societies in which they are implemented.
Further reading on Perlego
Social Movements in Times of Austerity: Bringing Capitalism Back Into Protest Analysis (2015) Donatella della Porta
Policing in an Age of Austerity (2012) by Graham Ellison and Mike Brogden
Austerity as Public Mood (2017) by Kirsten Forkert
Neo-Liberalism and Austerity (2016) by Peter Kelly and Jo Pike
Everyday Life in Austerity (2019) by Sarah Marie Hall
What is austerity in simple terms?
What is an example of austerity?
What are some criticisms of austerity?
Bibliography
Alesina, A., Favero, C., and Giavazzi, F. (2019) Austerity: When It Works and When It Doesn't. Princeton University Press. Available at: https://www.perlego.com/book/788308/austerity-when-it-works-and-when-it-doesnt
CIA World Factbook 2022-2023. (2022) Skyhorse. Available at: https://www.perlego.com/book/3026319/cia-world-factbook-20222023
Doxiadis, E. and Placas, A. (eds.) (2018) Living Under Austerity: Greek Society in Crisis. Berghahn Books. Available at: https://www.perlego.com/book/668095/living-under-austerity-greek-society-in-crisis
Evans, B.M. and Fanell C. (2018) The Public Sector in an Age of Austerity: Perspectives from Canada’s Provinces and Territories. McGill-Queen's University Press. Available at: https://www.perlego.com/book/3551730/the-public-sector-in-an-age-of-austerity-perspectives-from-canadas-provinces-and-territories
Fraser, N. (2022) Cannibal Capitalism: How our System is Devouring Democracy, Care and the Planet and What We Can Do About It. Verso. Available at: https://www.perlego.com/book/3710309/cannibal-capitalism-how-our-system-is-devouring-democracy-care-and-the-planet-and-what-we-can-do-about-it
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Levey, C., Ozarow, D. and Wylde C. (2014) Argentina Since the 2001 Crisis: Recovering the Past, Reclaiming the Future. Palgrave Macmillan. Available at: https://www.perlego.com/book/3489531/argentina-since-the-2001-crisis-recovering-the-past-reclaiming-the-future
McBride, S., Evans, B., and Plehwe, D. (2021) The Changing Politics and Policy of Austerity. Policy Press. Available at: https://www.perlego.com/book/3533352/the-changing-politics-and-policy-of-austerity
Varoufakis, Y. (2015) The Global Minotaur: America, Europe and the Future of the World Economy. Zed Books. Available at: https://www.perlego.com/book/2706687/the-global-minotaur-america-europe-and-the-future-of-the-world-economy
MA, Sociology (Freie Universität Berlin)
Lily Cichanowicz has a master's degree in Sociology from Freie Universität Berlin and a dual bachelor's degree from Cornell University in Sociology and International Development. Her research interests include political economy, labor, and social movements. Her master's thesis focused on the labor shortages in the food service industry following the Covid-19 pandemic.