In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.

Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt. Austerity was named the word of the year by MerriamWebster in 2010. Reasons for taking austerity measures Austerity measures are typically taken if there is a perceived threat that government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies which they have no right to issue or they have been legally forbidden from issuing their own currency. In such a situation banks may lose trust in government's ability and/or willingness to pay and refuse to roll over existing debts or demand exorbitant interest rates. In such situations, inter-governmental institutions such as the International Monetary Fund (IMF) typically come in and demand austerity measures in exchange for functioning as a lender of last resort. 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 that are targeted 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. Theoretical considerations Contemporary mainstream economists consider macroeconomic policy in a dynamic stochastic general equilibrium (DSGE) framework, where fiscal policy is discussed within an optimal taxation framework that assumes a representative agent is optimizing over a longterm horizon. The reasoning behind such models is that the effect of any government deficit can be alleviated by changes in spending decisions. This occurs because the agent will be responsible for paying off that deficit in the future. Thus, from a modern mainstream macroeconomist's point of view, reducing government deficit allows the private sector to consume more and support the economy. This viewpoint stems from their belief in the existence of a general economic equilibrium, which predicts that economic fluctuations revert back toward a "normal" state of affairs automatically. For this reason econometric models that are used in economic forecasting are calibrated to show convergence to full resource utilization and employment despite government's fiscal tightening. Old-Keynesians, such as Alvin Hansen, had a totally opposite view: they argued that government deficits provide the private sector both with new money for saving (the deficit) and a means to save (government interest-bearing bonds), increasing private sector wealth, and this wealth effect would reduce the need to save from current income. In their view government debt enabled the private sector to continue consuming. It was therefore not a burden, at least when held domestically, but a necessity. This approach has interesting parallels with Richard Koo's recent concept of balance-sheet recession.

The chartalist school argues that money exists because of government's charter and not because of the existence of gold and silver (metallism). They advocate government's active management of the money supply, and creation and destruction of money if necessary. Controversy Main article: Anti-austerity protests Austerity programs can be controversial, as they tend to have an adverse impact on the poorest segments of the population. In many situations, austerity programs are implemented by countries that were previously under dictatorial regimes, leading to criticism that the citizens are forced to repay the debts of their oppressors Economist Richard D. Wolff has stated that instead of cutting government programs and raising taxes, austerity should be attained by collecting from non-profit multinational corporations, churches, and private tax-exempt institutions such as universities, which currently pay no taxes at all In 2009 and 2010, workers and students in Greece and other European countries demonstrated against cuts to pensions, public services and education spending as a result of government austerity measures Opponents argue that austerity measures tend to depress economic growth, which ultimately causes governments to lose more money in tax revenues. In countries with already anemic economic growth, austerity can engender deflation which inflates existing debt. This can also cause the country to fall into a liquidity trap, causing credit markets to freeze up and unemployment to increase. Opponents point to cases in Ireland and Spain in which austerity measures instituted in response to financial crises in 2009 proved ineffective in combating public debt, and placing those countries at risk of defaulting in late 2010 Word of the year Merriam-Webster's Dictionary named the word "austerity" as its "Word of the Year" for 2010 because of the number of web searches this word generated that year. According to the president and publisher of the dictionary, "austerity had more than 250,000 searches on the dictionary's free online [website] tool" and the spike in searches "came with more coverage of the debt crisis Governments all over the world have hit the wall. It doesn't matter where we look: National, state and local government budgets are in crisis. This cannot continue. Major policy shifts are underway. The time for austerity has come. There are three types of austerity. Good, bad and ugly. Good austerity is the kind that puts the pain on the government sector. Bad austerity is the kind that tries to spread the pain across the public and private sectors. Ugly austerity is the kind that tries to put all the pain on the private sector. The extent of the crisis first became apparent in Europe where governments have pushed taxation to the limit and then promised and spent even beyond that. Pensions are

unaffordable, spending is out of control and government regulations to try and keep it all glued together are unbearable. The problems are now spreading to state and local government in America. So far, at least, the backlash against U.S. federal government spending is political, not financial. The government can still borrow at 3%, or less, for 10 years. But Americans are looking around the world, and at their own state budgets, and see the eventual problems to come. The problem is that taxation can only go so far. No matter how many government programs are deemed necessary and a fundamental right of social justice, the economy can only support so much redistribution before falling apart. Ugly austerity comes in the form of higher taxes. It requires workers and investors to transfer more resources to the government today, so that the government can continue to transfer money to politically favored groups. In a way, policymakers who favor this course of action are saying that in order to avoid higher taxes in the future we should just start paying higher taxes today. (What a bargain!) The other problem with this course--which is what will happen in the U.S. at the start of next year if all or part of the 2001/2003 tax cuts are allowed to expire--is that economists across the political spectrum agree that higher taxes will slow economic growth compared to what it would otherwise be. Maybe that's why several Congressional Democrats have recently gone public with their opposition to raising tax rates next year. Higher taxes, by cutting growth, don't generate as much revenue as estimated. A vicious cycle of higher taxes, slower growth, more debt and even higher taxes is the result. Bad austerity mixes in spending cuts. Prominent examples of this can be seen in Europe. In the U.K. spending is being cut, but the value-added tax is going up by 2.5 percentage points to 20%. Greece did a mixture as well. The problem in Europe, and in many U.S. states, is that spending is so high already that taxation cannot possibly pay for it all. Many of these government entities have already gone into a death spiral, where tax rates are already too high and higher tax rates end up reducing the size of the economy. This leaves good austerity, which comes in the form of spending cuts, which quite literally force policymakers to transfer fewer resources to those they favor. Politically this is very difficult, but the real argument against it is economic. Keynesians (like Paul Krugman) argue that spending cuts hurt the economy. But nothing could be further from the truth. The benefit of spending cuts is that they can set off a virtuous cycle, reducing expectations of future taxes while invigorating the incentive to participate in the private sector. Every dollar less in government spending, whether financed by taxation or borrowing, means a dollar more in private sector spending. This is unambiguously positive for the macro-economy. Of course, those who have counted on government for business or transfer payments do not see it this way But voters and taxpayers, who were not around when promises were made, don't feel beholden to support them. This is why political pressure to hold the Bush tax cuts in place is so plainly visible. The age of austerity for government has arrived. The only question is what form that austerity will take.

MEXICO CITY, Feb 7 The Mexican Government said today it would cut public spending by about $470 million and sell 236 state-run enterprises as part of its economic austerity program. Officials said the measures, announced in a statement, aimed to compensate for a fall in dollar revenues caused by a drop in oil prices. On Monday, the Government announced a $1.25-a-barrel cut in the price of its light Isthmus crude. The Mexican price cut was forecast to lead to a $300 million drop in oil revenues. According to the statement, Mexico will reduce subsidies and shelve nonpriority investment projects totaling $465 million. In addition, the Government will ''liquidate, transfer, or sell 236 state entities as part of a series of measures to confront recent economic events.'' The announcement did not list the companies involved Nobel laureate Joseph Stiglitz said Ireland is in a dismal position and there is little chance that the governments measures to reduce the budget and bail out banks will be a success. The austerity measures are weakening the economy, their approach to bank resolution is disappointing, Stiglitz, a Columbia University economics professor, said in a Bloomberg Television interview in Hong Kong today. The prospect of success is very, very bleak for the governments plan to resolve the problem, he said. Irish bonds have plunged in the past month on investor concern the government will have to turn to the European Union and International Monetary Fund for aid. Finance Minister Brian Lenihan has said Ireland wont need external help and central bank governor Patrick Honohan said yesterday he expects the government to be able to return to the bond market next year. Ireland has since 2000 seen a property bubble and excessive expansion of the financial system, fake growth is all you can call it, Stiglitz said. It is not a surprise to see a spiking of the spreads between the interest rate that Ireland has to pay and Germanys. The premium investors charge to hold Irish 10-year bonds rather than benchmark German bunds widened to a record 651 basis points today. That compares with 422 basis points a month ago. Ireland had the highest euro-region budget deficit in 2009, at 14.4 percent of gross domestic product, followed by Spain and Portugal, the EUs statistic office said Oct. 22.

Problem
Stiglitz also said that one reason for the bleak prospect for Irish budgetary success is that the authority that helped create the problem stayed in power. Irelands ruling Fianna Fail party, led by Prime Minister Brian Cowen, dropped to its lowest level of support last month, according to a Red C poll published by the Sunday Business Post newspaper on Oct. 24. The party has been in power since 1997.

The economics professor said the uneven pace of economic growth between Asian and advanced economies has created a divided world on inflation. Inflation wont be the major problem for most advanced economies like the euro region and the U.S., whereas it is a concern for Asian policy makers, he said. The U.S. Federal Reserves plan to expand stimulus will lower the dollars value and fuel potential asset bubbles in emerging countries, which may drive up commodity prices and hurt the U.S. economy in a backfire, Stiglitz said., The U.S. could wind up in the position of stagflation, Stiglitz said. We are facing higher commodity prices -- at the same time, we have weak aggregate demand in U.S. China raised reserve requirements for some banks twice yesterday, taking the total increase to 100 basis points for a few lenders, said two people with direct knowledge of the situation. Chinese inflation accelerated to the fastest pace in two years in October. China will likely further tighten policy by quantitative tools like the reserve requirement ratios for banks, rather than raising interest rates, Stiglitz said. If you raise the interest rates to dampen on the economy, you could get inflow of capital, he said. That could make things worse.