Austerity

Governments may adopt austerity when debt levels become very high, when investors begin demanding higher interest rates to lend to them, or as a condition of receiving financial assistance from international organisations or other countries.

Austerity measures can include cutting public sector jobs and wages, reducing welfare benefits, delaying infrastructure projects, raising taxes such as value-added tax and reforming pensions.

For example, after the 2008 financial crisis and the European debt crisis that followed, several European countries introduced austerity programmes to reduce their deficits.

Austerity is highly debated. Supporters argue that it restores confidence in government finances, lowers borrowing costs and prevents debt from becoming unsustainable. Critics argue that cutting spending during a weak economy can reduce demand, deepen recessions and raise unemployment, which in turn reduces tax revenues and may make it harder to cut debt as a share of GDP. The effects depend heavily on the circumstances, including the state of the economy and how the measures are designed.