What is austerity?

LOTS of people debate and campaign against austerity, but what exactly is it? Dictionary definitions vary. Merriam-Webster defines it as

a situation in which there is not much money and it is spent only on things that are necessary

or

enforced or extreme economy

An austere individual would be someone who lives within their budget, that is, spends less than their annual income. Anyone who has lived through a round of cost-cutting at a company will know it usually involves absolute reductions in spending; a clampdown on expenses (taxis, overseas trips) and staff redundancies.

But that is not what economists tend to mean when they talk about austerity. A government can impose an austerity programme and still spend far more than it receives in the form of taxes; indeed the British coalition government had a deficit of 9.3% of GDP in the first year of austerity, a very high figure by peacetime standards. But because this was less than the 11% of GDP in the year before, it counts as austerity.

What economists generally mean by austerity is a reduction in the "structural deficit" of the government, that is, ignoring the effects of the economic cycle. The automatic stabilisers of the economy...Continue reading