The term austerity refers to a set of economic policies that a government implements in order to control public sector debt. Governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility.
In short, austerity helps bring financial health back to governments.1 Default risk can spiral out of control quickly and, as an individual, company, or country slips further into debt, lenders will charge a higher rate of return for future loans, making it more difficult for the borrower to raise capital.
KEY TAKEAWAYS
Austerity refers to strict economic policies that a government imposes to control growing public debt, defined by increased frugality.
There are three primary types of austerity measures: revenue generation (higher taxes) to fund spending, raising taxes while cutting nonessential government functions, and lower taxes and lower government spending.
Austerity is controversial, and national outcomes from austerity measures can be more damaging than if they hadn't been used.
The United States, Spain, and Greece all introduced austerity measures during times of economic uncertainty.
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Explanation:
What Is Austerity?
The term austerity refers to a set of economic policies that a government implements in order to control public sector debt. Governments put austerity measures in place when their public debt is so large that the risk of default or the inability to service the required payments on its obligations becomes a real possibility.
In short, austerity helps bring financial health back to governments.1 Default risk can spiral out of control quickly and, as an individual, company, or country slips further into debt, lenders will charge a higher rate of return for future loans, making it more difficult for the borrower to raise capital.
KEY TAKEAWAYS
Austerity refers to strict economic policies that a government imposes to control growing public debt, defined by increased frugality.
There are three primary types of austerity measures: revenue generation (higher taxes) to fund spending, raising taxes while cutting nonessential government functions, and lower taxes and lower government spending.
Austerity is controversial, and national outcomes from austerity measures can be more damaging than if they hadn't been used.
The United States, Spain, and Greece all introduced austerity measures during times of economic uncertainty.