Austerity

In economics, austerity describes policies used by governments to reduce budget deficits during adverse economic conditions. These policies can include spending cuts, tax increases, or a mixture of the two.^[1][2][3] Austerity policies demonstrate governments' liquidity to their creditors and credit rating agencies by bringing fiscal income closer to expenditure.
The economic effects of austerity are unclear, due to its wide and non-specific definition, the limited historic sample of natural experiments and the potential conflation with the effects of other events which tend to precede austerity, such as recessions and financial crises. In macroeconomics, reducing government spending generally increases unemployment. This increases safety net spending and reduces tax revenues, to some extent. Government spending contributes to gross domestic product (GDP), so the debt-to-GDP ratio which signifies liquidity may not immediately improve. Short-term deficit spending particularly contributes to GDP growth when consumers and businesses are unwilling or unable to spend.^[4] Under the theory of expansionary fiscal contraction (EFC), a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion.^[5]

Justifications

Austerity measures are typically taken if there is a threat that a government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue or if they have been legally forbidden from issuing their own currency. In such a situation, banks and investors may lose trust in a government's ability and/or willingness to pay and either refuse to roll over existing debts or demand extremely high interest rates. In such situations, inter-governmental institutions such as the International Monetary Fund (IMF) may demand austerity measures in exchange for functioning as a lender of last resort. When the IMF requires such a policy, the terms are known as 'IMF conditionalities'.
In some cases, governments became highly indebted after assuming private debts following banking crises. For example, this occurred after Ireland assumed the debts of its private banking sector during the European sovereign debt crisis.^[6]
Around 2011, the IMF started issuing guidance suggesting that austerity could be harmful when applied without regard to an economy's underlying fundamentals.^[7] In 2013 they published a detailed analysis concluding that, "if financial markets focus on the short-term behavior of the debt ratio, or if country authorities engage in repeated rounds of tightening in an effort to get the debt ratio to converge to the official target," then austerity policies could slow or reverse economic growth and inhibit full employment.^[8] Keynesian economists and commentators such as Paul Krugman have suggested that this has in fact been occurring, with austerity yielding worse results in proportion to the extent to which it has been imposed.^[9][10]

Typical effects

Development projects, welfare, and other social spending are common programs that are targeted for cuts: Taxes, port and airport fees, train and bus fares are common sources of increased user fees. Retirement ages may be raised and government pensions reduced.
In many cases, austerity measures have been associated with protest movements claiming significant decline in standard of living. A representative example is the nation of Greece. The financial crisis—particularly the austerity package put forth by the EU and the IMF— was met with great anger by the Greek public, leading to riots and social unrest. On 27 June 2011, trade union organizations commenced a forty-eight hour labor strike in advance of a parliamentary vote on the austerity package, the first such strike since 1974. Massive demonstrations were organized throughout Greece, intended to pressure parliament members into voting against the package. The second set of austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favor. However, one United Nations official warned that the second package of austerity measures in Greece could pose a violation of human rights.^[11]