In economics, the word austerity denotes a radical effort to reduce spending or to regain financial solvency through the implementation of stern economic measures.

Governments and companies typically implement austerity measures when their debt becomes so large that they run the risk of default.

In the case of companies, austerity measures may include radical layoffs, cutbacks on research and development spending and the termination of unprofitable business endeavors. Government austerity measures typically include tax increases, the implementation of new taxes, cutbacks on social security benefit distributions and general cutbacks on government spending.

If austerity measures are successfully implemented, the government or company may be able to avoid defaulting on their debt and destroying their credit ratings. In the best case, the successful implementation of austerity measures will restore investor’s faith in the company or government in question, enabling that entity to access loans or investment capital.

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