Usually refers to the practice of a government that reduces public spending enough to reduce national budget deficit levels and to gain control of the country’s finances and/or the financial sector when they get out of hand. These measures can be unpopular because they can drastically reduce public service programmes, hinder growth and put an economy into recession even when they may be good for a country in the long-run.
Using austerity measures to control budget deficit can sometimes have severe negative effects. Since the level of government spending is reduced so much that gdp contracts (along with other multiplier effects), which makes the debt-to-gdp ratio increase. This can cause lenders, creditors and credit ratings agencies to negatively revaluate their positions about a country and, for example, reduce their credit rating and increase their country-risk level. Some economists argue in favour of controlling debt and reducing budget deficit levels with austerity measures during times of crisis to prevent things from going too far. Other economists argue that prosperous moments are best for austerity measures since saving during times of economic expansion won´t hurt the economy too much (according to Keynes’ theories). The U.S. put some austerity measures into practice towards the end of the 1990s during an economic expansion and found some mild success while helping to balance its budget. The U.K.’s coalition Prime Minister coined the term “the age of austerity”, referring to the end of excessive government spending. According to Merriam-Webster’s Dictionary, austerity was the word-of-the-year in 2010 for the number of searches that were performed on its website.