Fiscal austerity

Austerity is a set of economic policies imposed on economies such as: cutting the state's budget to stabilize public finances, restore competitiveness through wage cuts and create better investment expectations by lowering future tax burdens. Policies grouped under the term 'austerity measures' may include spending cuts, tax increases, or a mixture of both, and may be undertaken to demonstrate the government's fiscal discipline to creditors and credit rating agencies by bringing revenues closer to expenditures.

In most macroeconomic models austerity measures generally increase unemployment as government spending falls, reducing jobs in the public and/or private sector. Meanwhile, tax increases reduce household disposable income, thus reducing spending and consumption. Countries which have benefited from austerity such as Ireland have in subsequent research shown to have suffered.

Since government spending contributes to the Gross Domestic Product (GDP), reducing the spending may result in a higher debt-to-GDP ratio, a key measure of a country's debt burden.

When an economy is operating at near capacity, higher short-term deficit spending (stimulus) can cause interest rates to rise, resulting in a reduction in private investments, which in turn reduces economic growth. In the case of excess capacity, however, the stimulus may result in an increase in employment and output.

A historical example in which austerity measures failed was in the aftermath of the Great Recession, where many European countries implemented such policies: unemployment rose to higher levels and debt-to-GDP ratios increased, despite reductions in budget deficits (relative to GDP).

The ethics of austerity have been questioned in recent years, the Royal Society of Medicine revealing that the United Kingdom's austerity measures in healthcare may have resulted in 30,000 deaths in England and Wales in 2015.

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