austerity

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Crowds standing in line at automatic teller machines (ATMs) in Greece.

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austerity, a set of economic policies, usually consisting of tax increases, spending cuts, or a combination of the two, used by governments to reduce budget deficits.

Austerity measures can in principle be used at any time when there is concern about government expenditures exceeding government revenues. Often, however, governments delay resorting to such measures because they are usually politically unpopular. Instead, governments tend to rely on other means—for example, deficit financing, which involves borrowing from financial markets—to mitigate budget deficits in the short run, a decision that usually necessitates the adoption of harsher austerity measures in the long run.

Historically, austerity measures have usually been implemented during times of economic crisis, when they are easier for governments to justify to their electorates and when they are often necessary to maintain a country’s credit worthiness in the eyes of lenders. During Argentina’s economic crisis in 1998–2002, the country adopted severe austerity measures, largely following the advice of its major creditor, the International Monetary Fund (IMF); they included cuts in government pensions and salaries and in numerous social programs, as well as significant tax increases. In return, the IMF agreed to extend a low-interest loan to the Argentine government to help its ailing economy. Russia and Turkey underwent similar hardships during their economic crises in 1998 and 2001, respectively. In Europe the Great Recession of 2007–09 forced many euro-zone countries (the countries that use the euro) to adopt similar austerity packages. Greece, Portugal, Spain, Ireland, Italy, and the United Kingdom implemented serious belt-tightening policies that involved severe cuts in social programs and concurrent tax hikes.

The use of austerity measures during times of economic hardship has caused much controversy about their purpose and usefulness. Many economists have pointed out that the measures have contractionary effects and usually exacerbate ongoing economic recessions. In fact, in many parts of the world, austerity measures imposed in the aftermath of economic crises have not helped countries move out of recession faster and have resulted in major public outrage and protests. In Argentina, Russia, and Turkey, for example, many high-level government officials resigned when mistimed austerity packages did more harm than good for their economies. Protests led by indignados (indignant citizens) erupted in Spain in May 2011, mainly fueled by the Spanish government’s decision to cut public spending for social programs. In Greece the Indignant Citizens Movement helped gather more than 300,000 people in front of the Greek parliament on June 5, 2011, resulting in months of protests, sit-ins, and sometimes-violent clashes with the police. The events in Greece eventually led to the defeat of the New Democracy party and a first-time victory for Syriza, whose major campaign promise had been to end austerity programs. Similar protests took place in Ireland, the United Kingdom, and other parts of Europe in 2010–11, usually resulting in the resignation of key government officials.