In economics, austerity is when a government reduces its spending and/or increases user fees and taxes to pay back creditors. Austerity is usually required when a government's fiscal deficit spending is felt to be unsustainable.
Austerity measures are typically taken after a government's bond rating is downgraded, making it more expensive to borrow money. Government bonds are typically downgraded when debt grows substantially as a portion of GDP. Government debt grows as spending exceeds tax revenue. Such excess occurs when tax rates are such that revenues are kept low while government spending is increased. Such excess can also occur when the economic activity stagnates or decreases, such as in a recession, thereby reducing the government's tax revenue.
Banks, or inter-governmental institutions such as the International Monetary Fund (IMF), may require that an indebted government pursue an 'austerity policy'. This typically occurs when the government must refinance loans that are about to come due, for which the government cannot pay. The government may be asked to stop issuing subsidies or to otherwise reduce public spending. When the IMF requires such a policy, the terms are known as 'IMF conditionalities'.
Typical effects
Development projects, welfare, and other social spending are common programs of spending for cuts. Taxes, port and airport fees and train and bus fares are common sources of increased user fees.
In many cases, austerity measures have been associated with short-term declines in standard of living until economic conditions improved and fiscal balance was achieved.
