What is Austerity?

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),

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),

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, 

As a result, Canada mitigated its deficit, which some economists argue led to economic growth:

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,”

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, 

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:

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, 

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,

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 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,   

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, 

Thus, instead of restoring investor confidence and ameliorating crisis, austerity tends to backfire by ostensibly mitigating one crisis by producing new ones:

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, 

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, 

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

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  

Konzelmann, S.J. (2019) Austerity. Polity. Available at: https://www.perlego.com/book/1536665/austerity 

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