Retrospectively, it may seem scarcely credible that an article was published in 2000 entitled “On the Economics of Disappearing Government Debt” (Reinhart et al. 2000). Escalating government debt has not always been a problem. The United States had a budget deficit problem in the 1980s, but strong economic growth in the 1990s led to a sequence of budget surpluses and a rapid decline in the debt–GDP ratio, so it seemed – for a brief period – that it had solved its deficit problem. The UK had a very large budget deficit in 2010, approaching 10 per cent of GDP, probably its largest ever peacetime deficit, but a number of years of austerity reduced the deficit so that the debt–GDP ratio was no longer rising and started on a downward path, at least before the pandemic. (However, the Covid-19 crisis looks set to generate a deficit that will break the record – by a considerable margin – for the largest peacetime deficit.)

Experience suggests that it is by no means impossible to bring down a large budget deficit. It usually requires several years of spending restraint, possibly accompanied by tax increases. However, it also seems to be the case that budgetary problems can emerge quite rapidly: by “rapidly” we mean over just a handful of years. For example, the Irish debt–GDP ratio was just over 20 per cent in 2007; by 2012 it had risen to over 120 per cent.

In this concluding chapter, we discuss a number of issues. We consider some criticisms of austerity and consider some of its political consequences. We examine some of the dilemmas facing policy makers contemplating austerity measures and discuss the important recent work by Alesina, Favero and Giavazzi on austerity. We then summarize the contributions of this book and consider some of the questions relating to austerity which still need to be resolved.

Austerity and its critics

Austerity policies of course have their critics.1 There are a number of different issues, which need to be carefully distinguished. The following criticisms have been levelled at austerity policies:

• • Austerity policies are never necessary.

• • Austerity policies are extremely harmful to the most vulnerable in society, as well as to others.

• • Austerity policies, if introduced in a recession, make the recession worse.