Introduction

Austerity has become a widely used term in economic policymaking circles, academic research, and the popular media, since concerns were raised about high levels of Greek sovereign debt following the 2008 financial crisis. In 2010, it was named “word of the year” by the Merriam Webster Dictionary, after a surge of more than 250,000 searches for the term on its website. However, there is no well worked-out theory of austerity in economic thought; and it remains a confusing and poorly understood concept.

Before World War II, austerity was primarily used to refer to harsh physical conditions and/or rationing. Yet during the turbulent interwar years, the British economist and Treasury advisor, John Maynard Keynes, famously argued that “[t]he boom, not the slump, is the right time for austerity at the Treasury.”¹ From this perspective, austerity is the necessary counterpart to a policy of economic stimulus, to be pragmatically applied when the economy appears “stuck” in one phase of the economic cycle or another. More recently – and especially since the 2008 financial crisis – austerity has been used to describe government deficit reduction policies involving spending cuts (and sometimes tax increases). However, it has also been used for political and ideological reasons (stated or not), as a means of reducing the size and economic role of the state, particularly with respect to social welfare provision.

While most contemporary austerity policies have similar overall (stated) objectives – reducing a government's commitment to both its annual deficit (if there is one) and (eventually) the level of public debt – there is significant variation in the specific measures involved; there is also a lack of consensus about which policies qualify as austerity measures. Nonetheless, the merits of generalized austerity continue to be the subject of intense political, economic, and social debate.

Although the aims of austerity policies and attitudes toward public debt have changed relatively little since they were first introduced – as we will see in Chapter 2, as well as in the comparative case studies presented later on – the social, economic and political context within which both austerity and debt now operate has evolved beyond all recognition. The uses to which national debt has been put have also significantly changed, particularly as governments have assumed responsibility for an expanding range of services, including social security, the cost of which fluctuates with shifts in the economic cycle and population demographics.

The dynamics of austerity policy have also evolved, and its effects have become more complex and wide-ranging as a result of political and socioeconomic developments and the shifting role of the state. At the same time, attitudes toward both personal and business debt have also moved on, as – especially since the 1970s collapse of the Bretton Woods international monetary system – the vastly expanded supply of available credit has permitted significant increases in both public and private debt as well as the leverage of globalized financial institutions.

However, despite radical changes in the context within which it operates, as we will see in Chapter 3, the economics of austerity (or stimulus) is fairly uncomplicated; and its likely impact on government accounts – in general terms, at least – is relatively easy to anticipate. Austerity's effect on the economy, however, while being technically straightforward to predict, will vary considerably according to the phase of the economic cycle in which it is implemented. The use of austerity to cool an overheating economy, for example, is likely to have more beneficial effects than if implemented when an economy is in recession – which is generally defined as a fall in Gross Domestic Product (GDP) for two consecutive quarters – with political and social factors playing an important role in such decisions.

The political and social dimensions of austerity, however, are more complex in terms of their influence and outcomes than the economic dimensions. The combined effect of economic, political, and social factors both on austerity and on the outcomes resulting from it must therefore be set into the context of how national accounting actually works, what impact differences in economic performance are likely to have, and how changes in the government's economic activity might influence the dynamics of the system. Only then can the less predictable, political, and social aspects of austerity be factored into the analysis.

Like the aims and primary components of austerity itself, as we will see in Chapter 4, many of the arguments used to garner political and/or public support for it have changed remarkably little since the times of Adam Smith, Jean-Baptiste Say, and the classical political economists. While these arguments may well have made economic sense when first advanced, most have since been overtaken by the evolution of political economy – notably the appearance of so-called “automatic stabilizers” – which can significantly affect the outcome of a program of austerity. As a result, many of these arguments are now open to debate.

Thus, while, on the face of it, when public debt levels are high, austerity might seem intuitively appealing and entirely sensible, even a cursory analysis reveals that cutting net public expenditure is likely to have a number of other, rather less desirable, results; and depending upon the political and socioeconomic context, it may well not have the desired effect on a government's deficit and debt –at the time of writing, indeed, it has not done so.

Overview of the Book

This book explores the economic, political, and sociocultural dimensions of austerity, as both an idea and a policy, through the basic mechanics of national accounting as well as comparative political and socioeconomic history from the seventeenth century onward, when the concept of “national debt” in the modern sense first emerged. Examining a range of comparative case studies, from the interwar years to the present, austerity's outcomes will be evaluated against its stated objectives, as will alternative policies under similar economic conditions.

The political economic, ideological, and sociocultural reasons behind both support for and opposition to austerity as a policy will be assessed, with a clear demarcation between critiques based on the implications of austerity for macroeconomic performance, output and growth, on the one hand, and those based on its sociopolitical implications in terms of distributional and social outcomes (such as poverty, inequality, and health), on the other. The book's overall aim is to demystify the concept of austerity, as both an economic idea and an approach to policy.

Chapter 2 locates austerity within its broader historical and theoretical context, tracing shifting reactions to the evolution of national debt – and the economic role of the state – since its first appearance during the late seventeenth century through to the present. We then explore the economics of austerity through the lens of national accounting in Chapter 3. Chapter 4 assesses the arguments that have recently been marshaled in support of austerity as a deliberate economic policy – as well as the counterarguments that have been made.

With these historical, analytical, and theoretical ideas in mind, in Chapters 5 through 8, we turn to a comparative analysis of the experiences of countries that, since World War I, either embraced austerity to confront the economic and political challenges they faced, or had it forced upon them as a condition for financial assistance. We will also examine cases where governments have chosen an alternative path to austerity. Our aim is to assess the outcomes realized in the light of the objectives, stated or otherwise. From this, it becomes clear that the question is not whether austerity is “good” or “bad” – or whether it benefits or damages economic growth – but rather, in what circumstances austerity might be deemed appropriate; and when it is more likely to be seen as counterproductive.

Chapter 9 considers the political economic, ideological, and sociocultural dimensions of austerity as a way of making sense of its tenaciousness, despite the policy's repeated failure to deliver on its promises. Chapter 10 concludes.