Basic concepts of macroeconomics: Austerity

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Annexe I: Basic concepts of macroeconomics

At the national level

National budget


‘Austerity’ is defined as reduced public spending (public spending cuts or austerity measures) and increased frugality by the state. This frugality may or may not include increased taxes, which are overwhelmingly regressive taxes such as VAT, rather than progressive taxes such as corporate or wealth taxes. On a national scale, this in turn results in reduced living quality for the majority of the population, while trying to establish a balance in the state budget.

After the 2008 financial crisis, austerity policies have become the ‘new normal’ in both high-income and developing countries. According to a recent estimate, almost six billion people (around 75% of the world’s population) will be living under the influence of austerity policies by 2021.1Ortiz, Isabel and Cummins, M. (11 October 2019). The Insanity of Austerity. Project Syndicate. Austerity measures have been an important component of the Structural Adjustment Programmes forced onto countries by international monetary institutions, such as the IMF.

The politics of austerity is not only limited to slashing public expenditures, such as healthcare and education. In the future, they may also include stagnating or falling wages for civil servants (e.g. teachers and healthcare workers), which would negatively affect the quality of public services. Furthermore, governments may encourage flexible labour arrangements by dismantling protective labour regulations, which would lead to deteriorating working conditions.

Austerity policies have detrimental effects for people and often lead to widespread discontent. For example, the proposed austerity measures in Ecuador under an IMF agreement led to widespread anti-government protests in the second half of 2019. Indigenous women played a leading role in protesting plans to slash fuel subsidies which increased the cost of transportation of goods, thus reducing the income of Indigenous communities.2Brown, K. (10 October 2019). Ecuador’s Indigenous People are Leading the Anti-government Protests. They Have a Record of Ousting Presidents. Washington Post; BBC News. (11 October 2019). Ecuador Protests: Indigenous Women Demonstrate in Quito.

Austerity is not the only option that governments have. There are alternative and more effective means to create fiscal space, such as progressive taxation, prevention of illicit financial flows, and productive investments. In this sense, austerity is not a remedy to economic problems. Rather, it is a political choice adopted by governments for its benefits to the rich at the expense of many.


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