Austerity
Also called: Fiscal austerity · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT
Meaning
Austerity means deep cuts in government spending, tax increases, or both, to bring down the deficit and public debt quickly. Governments usually adopt it during a crisis, often when lenders or markets lose confidence. The risk is that it cuts aggregate demand (total spending) just when the economy is already weak, so output and jobs fall further. The "expansionary austerity" debate asks whether cuts can boost growth by raising confidence. The evidence mostly says they cannot during a slump.
Example
After 2010, Greece and other eurozone countries made sharp spending cuts to reduce their debt. These cuts deepened their recessions.
Don't confuse with
- Fiscal consolidation: a gradual cut in the deficit along a planned glide path. An example is India bringing its fiscal deficit down from 9.2% of GDP (2020-21) to 4.4% (2025-26 RE). Austerity is a sudden, deep squeeze, usually forced by a crisis.
Related concepts
- Automatic stabiliser
- Discretionary fiscal policy
- Countercyclical fiscal policy
- Procyclical fiscal policy
- Fiscal stimulus
- Fiscal space
- Fiscal drag
- Structural deficit