Austerity is back globally and may prove even more self-destructive this time

Hence, Reeves, the UK’s Chancellor of the Exchequer, has tightened rules for government spending and investment, despite the fact that fiscal constriction has been a major cause of the country’s problems over the past 15 years. Similarly, Milei has framed austerity as the price Argentina must pay for 20 years of overextension. He argues that defeating inflation is the only path to prosperity, even if doing so deepens an already deep well of poverty.

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And for Musk, the US needs austerity to spare it from bankruptcy. This argument is just a ruse: states with sovereign currencies, especially the main global reserve currency, cannot go bankrupt. Musk’s obvious motivation for slashing public budgets is to make room for tax cuts and fire public employees who do not share his agenda.

The last time we heard the drumbeat of austerity was during the global financial crisis. In the US, the prescribed response took the form of a milquetoast ‘sequester’ (spending caps). But in Europe, fiscal tightening went much further, destroying a decade’s worth of growth, undermining public investment and contributing to many of the problems that the continent is still struggling with today.

A failure of private finance was rechristened a crisis of runaway state spending. Bilateral loans to the EU’s periphery states were little more than disguised bailouts of core countries’ banks ‘paid for’ by fiscal contractions. 

Those offering elaborate arguments on the expansionary power of fiscal tightening were denying the obvious: When the private sector is trying to save and the public sector does the same, the economy will shrink and the debt stock will grow larger as a share of GDP.

Also Read: The Draghi report has rung an alarm that Europe can’t afford to sleep through

This was the essence of Europe’s self-defeating experiment with austerity in the 2010s. By 2016, even the European Commission had begun to change its tune; and by the time covid struck, the days of ‘growing the economy by shrinking it’ seemed to be over. How wrong we were.

As John Quiggin argued at the time, austerity is a zombie idea: It can’t be killed because it is immune to empirical refutation. The wisdom of the covid crisis—when the sound response was to bail out the economy in the face of a global shutdown—thus became another ‘runaway debt crisis’ that threatens to bankrupt the state.

Back in the 2010s, austerity in the EU was supposed to stabilize public finances by ‘restoring confidence’ in the bond market. But spend cuts when the economy was in recession simply compounded the problem. Fear of inflation owing to ‘all that spending’ quickly turned into fear of deflation and declining confidence. Austerity in a recession simply produces more recession and unemployment.

But what about austerity under other conditions? 

The current cases of the US and Argentina are interesting. For its part, the US is nowhere near a recession. The economy is powering ahead and facing inflationary pressures. In addition to freeing up fiscal space for tax cuts, another possible explanation for pursuing austerity under such conditions concerns geopolitics and global imbalances.

Also Read: DOGE can’t really help the US dodge its debt overload problem

When Joe Biden took office in early 2021, he kept most of Donald Trump’s tariffs in place and embarked on a path of ‘green’ re-industrialization. Trump, back in power, is raising tariffs further to force adjustments in exporting economies and replacing Biden’s green strategy with a fossil-fuelled approach. But this isn’t the whole story. 

Musk and his Department of Government Efficiency (DOGE) are pursuing the Republican (and libertarian) dream of dismantling the modern administrative state. They would much prefer the 19th-century state, which used tariffs to protect domestic industry and raise government revenue. The implication is that Silicon Valley’s tech lords will reprise the role played by the robber barons of the Gilded Age. Thus, austerity is being dusted off for a whole new set of purposes.

Argentina, by contrast, faces permanent high inflation without real (inflation-adjusted) GDP growth. More than a dozen stabilization plans have come and gone and Milei has achieved what seemed impossible: a broad electoral coalition in favour of austerity.

Milei owes his success so far to the distributional politics of permanent inflation. The Peronists lost their long hold on the poor and working class because such voters spend the greatest share of their incomes on consumption and inflation hurt. 

Also Read: Will Javier Milei dare dollarize Argentina?

The Peronist coalition managed to shelter unions from inflation by indexing wages accordingly and the professional classes sheltered themselves with dollar holdings. For a while, this was sufficient for Peronists to win elections. But those without such protection suffered falling consumption and poverty increased year after year. 

Milei offered a way out. He would embrace austerity, destroy Peronist networks, disrupt middlemen and deregulate everything. It would hurt for a while, but it would crush inflation and destroy Peronist insiders’ ability to protect themselves. Their pain would be your gain. This is austerity as schadenfreude politics, much like the war on federal employees in the US.

Will it work? In Argentina, if the point is to defeat inflation despite rising poverty, then yes. But it’s electorally sustainable only if lower inflation leads to more investment and rising real wages. If it leads to deeper poverty, Milei may lose his base. 

In the US, if the goal is to dismantle the administrative state, austerity will work. But in a country where 53% of counties are dependent on state transfers for a quarter or more of their incomes, it may backfire. Still, if Republicans get $4 trillion worth of tax cuts for the top 10%, the scheme might be worth it.

Austerity is back, but this time it is not just a bad idea. It is also a political weapon and a dangerous redistributive tool. ©2025/Project Syndicate

The author is professor of international economics and director of the Rhodes Centre for International Economics and Finance at Brown University, and the author of ‘Austerity: The History of a Dangerous Idea’.