Embedded Files
Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 5.1.1 The state as a system, which defines the state, its parts and their relationships, and some ways to classify states
Section 5.1.2 Origins, legitimacy and power of states, which explains how states came about, how they gain legitimacy and maintain power
Section 5.1.3 Functions of the state, which explains the various roles of the state in providing goods and services, protecting the population, and stabilising and guiding change
Section 5.1.4 Balancing state and non-state power, which explain the importance of balancing state and non-state economic power and strategies to achieve such a balance
Section 5.1.5 State narratives: Neoliberalism, which describes the neoliberal narrative and explains how it came to dominate economic thinking
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Learning objectives:
discuss how budget limits and austerity policies threaten the state’s ability to meet human needs within planetary boundaries
In 2024, Kenya saw widespread protests after the state introduced new taxes. Officials said the money was needed to fund services and repay debt. But many people, especially low- and middle-income households, saw the taxes as unfair. They were already struggling with high living costs. The protests reflected a deeper frustration. When states face financial stress, the burden often falls on ordinary people, while powerful groups are protected.
Figure 1. Kenyan protests against increased taxes, part of a state austerity policy
(Credit: Capital FM Kenya, Wikimedia Commons, CC BY 3.0)
Where do states get money and what do they spend it on?
Where do states get money and what do they spend it on?
States use public money to fund healthcare, education, housing, transport, energy, social protection, and emergency services. These services help households, markets, and commons function more effectively.
Most states raise money through taxes, borrowing, or creating it. They collect taxes on wages, business income, and spending. They may also borrow from banks, international institutions like the International Monetary Fund (IMF), or private investors. A few states, such as the UK or Japan, can create money through their central banks.
States that issue their own currency often spend first and collect taxes afterwards. Other states must borrow in foreign currencies, like the US dollar, or share a currency like the euro. These states have less flexibility and face stricter spending limits.
Topic 6: Money and finance will cover thes financing issues in greater detail.
What are budget limits?
What are budget limits?
A budget is a plan for how a state collects and spends money. Some states face real limits. If they borrow in a foreign currency, they must repay that loan in the same currency. If their own currency weakens or their exports fall, it becomes harder to pay back the debt because they have less access to foreign currency.
Other limits are imposed. For example, states in the eurozone (Figure 2) must follow strict rules that limit their ability to borrow or spend freely. These rules reduce their ability to spend money to respond to crises. The IMF and other lending institutions may impose budget limits on countries that borrow money from them.
Some limits are political. States may say they ‘have no choice’ but to cut spending. In reality, these choices often reflect the interests of powerful groups, such as lenders or businesses that gain from privatisation when public assets are sold to pay debts.
Figure 2. Countries in the Eurozone that share the euro currency, 2025.
(Credit: JLogan, Wikimedia Commons, public domain)
What is austerity?
What is austerity?
Austerity refers to policies that reduce state spending, raise taxes, or both. These are usually introduced after a financial crisis or under pressure from lenders like the IMF. But some states choose austerity even when it is not strictly necessary.
Supporters say austerity protects economic stability and reduces debt risks. Critics argue it harms those already under pressure. Austerity rarely includes a vision for improving people’s lives. It often focuses only on lowering yearly budget deficits, the difference between spending and revenues, or the total amount of debt.
Figure 3. Austerity measures cause enormous stress for households and worsen economic and social inequalities.
(Credit: whatthefeed, CC BY NC-ND 2.0)
Who is harmed by austerity, and who is protected?
Who is harmed by austerity, and who is protected?
Austerity does not affect all people in the same way. While some groups suffer, others are protected or even benefit. These patterns reveal much about power in the economy.
Worsening inequalities
Worsening inequalities
When states cut funding for healthcare, education, housing, and transport, people who depend on these services suffer most. In the UK, austerity measures introduced after 2010 led to a sharp rise in food bank use (Figure 4) as housing and social welfare support were cut. In South Africa, reduced spending on infrastructure made it harder for low-income communities to access clean water and electricity, increasing health risks.
Figure 4. Austerity has caused a significant rise in the use of food banks in the UK
Women are especially affected. They are more likely to work in public sector jobs like teaching, nursing, and care, the sectors that often face cuts. When support for childcare or eldercare is reduced, women take on more unpaid care work. This limits their time for paid employment or education. In Spain and Argentina, austerity weakened maternity support and pushed many women into informal, unstable jobs.
Disabled people often lose essential support services. Ethnic minorities and low-income workers are more likely to lose their jobs when services are cut. They are also hit harder by rising costs for services that were once free. Austerity tends to increase inequality and deepen existing disadvantages.
Protecting and helping the powerful
Protecting and helping the powerful
At the same time, many states find money for other priorities. After the 2008 financial crisis, governments spent large sums to rescue failing banks. In recent years, military spending in Europe has risen sharply (Figure 5). Yet when it comes to healthcare, schools, or climate action, the same governments often claim there is no money.
Economist Clara Mattei argues that austerity protects the wealthy and weakens countervailing power (Section 5.1.4). Austerity raises unemployment, reduces wages, and cuts social welfare support. This weakens the power of working people to demand better conditions and increases profits for large firms. She also warns that austerity can increase support for authoritarian leaders (Section 5.1.5). When economic hardship grows, people may look to strong leaders who promise order but weaken democratic rights.
States also lose public money through tax avoidance. Large companies shift profits to countries with very low taxes. Wealthy individuals hide money in offshore accounts. In some cases, the money lost through tax avoidance is greater than what austerity measures save.
Austerity is often described as necessary, but more often it is a political choice. It protects the wealthy and shifts the burden onto people with fewer resources and less power. Understanding who is harmed and who is protected helps us question whether austerity is the best path forward.
Figure 5. During the 2025 German elections, conservative candidates insisted that removing constitutional deficit limits in German state spending was impossible for social, infrastructure, and military support—only to reverse their stance for billions in military support once in power.
(Credit: Tim Rademacher, CC BY-SA 4.0)
Figure 6. Some wealthy individuals and corporations use strategies to avoid paying their fair share of taxes, contributing to state budget problems.
(Credit: pla2na, licensed from Adobe Stock)
What are the alternatives to austerity?
What are the alternatives to austerity?
Some states have taken different paths with better results. After 2015, Portugal reversed many austerity policies imposed on it by international organisations after the financial crisis. It raised the minimum wage, restored pensions, and invested in public services. The economy recovered without the deep social damage seen in countries that followed strict austerity like Greece.
In Ecuador, the government raised taxes on large corporations and used the extra revenue to fund healthcare, education, and infrastructure. These policies were later reversed, but for a time they helped improve public wellbeing and reduce economic inequality.
During the Great Depression in the 1930s, the United States invested in large-scale public projects (Figure 7). The state created jobs by funding roads, parks, schools, and arts programmes. These investments supported households and helped rebuild the economy.
Figure 7. The United States employed millions during and after the Great Depression in the 1930s, investing money in public works from infrastructure, to arts, education and more. WPA stands for Works Progress Administration
(Credit: Wikimedia Commons and Library of Congress)
States today still have options. They can raise taxes on those who can afford it, close tax loopholes, and enforce fairer tax rules. They can also borrow and invest in public goods that support long-term resilience. Austerity is not the only path.
Does austerity bring recovery?
Does austerity bring recovery?
The case of Greece shows how complex this question is. After the 2008 financial crisis, the Greek state faced high debt. For years, it had borrowed heavily, often with support from banks and international consultants. Much of this borrowing did not benefit the wider public.
To avoid default, not being able to pay debts, Greece accepted emergency loans from the EU, the European Central Bank (ECB), and the IMF. In return, the state cut spending, reduced pensions and wages, and raised taxes. The results were severe. The gross domestic product (GDP) declined, unemployment soared, and poverty deepened. With less activity, tax revenues fell. The state had even less money to support people during the crisis.
More than a decade later, Greece’s economy is growing again, and bailout loans are being repaid. Some argue this proves austerity worked. Others say the recovery was too slow and came at too high a cost. Many people lost trust in the state and its ability to care for society.
Figure 8. There were mass protests in Greece against austerity measures imposed by international lending institutions.
(Credit: Kotsolis, CC BY-SA 3.0)
Austerity policies remain common across the world. Sometimes states may need to cut spending or raise taxes. But it is important to ask:
Why are these measures being introduced?
What is being cut—and why?
Who benefits, and who is harmed?
Are there fairer alternatives?
Alternatives to austerity exist, including better tax enforcement and higher taxes for those who can afford them and investment in public services that make economic activity among the other provisioning institutions easier and more effective. But these require different political priorities that strengthen the economy, protect people and care for the planet. Understanding these issues helps us question economic decisions, imagine and demand a better future.
Activity 5.2.1
Activity 5.2.1
Concept: Power
Skills: Thinking skills (application)
Time: varies, depending on option
Type: Individual, pairs, group
Option 1: How do budget limits and austerity threaten state functions?
Time: 25 minutes
Look back at what you learned about the three main functions of the state in Section 5.1.3 (Figure 9). Then reflect on what you have learned in this section about budget limits and austerity.
Working individually, with a partner, or in a small group:
Explain how budget limits and austerity can hinder the state from carrying out its functions.
Are there some functions that might be more affected than others? If so, why?
Figure 9. Three broad functions of the state. How does austerity threaten them?
Option 2: Budget limits and political choices
Time: 25 minutes
This section explains that austerity is often described as a financial necessity, but involves political choices. In this activity, you’ll explore how political priorities shape what gets cut and what doesn’t.
Imagine a fictional state facing financial difficulties. Here is a list of services and programmes that the state funds:
Free school meals
Military spending
Public housing
Renewable energy investment
Healthcare for all
Road building and maintenance
University scholarships
Bailouts for large corporations
The state says it needs to cut three items from its budget. In pairs or small groups, decide which three you would cut and explain why. Then answer:
What values shaped your choices?
Who would be most affected by your cuts?
How might a different group make a different decision?
Be ready to share your group’s decisions and reasoning with the class.
Option 3: Who benefits, who is harmed?
Time: 40 minutes
This activity focuses on power and inequality. It helps you analyse how different groups are affected by austerity and how some benefit from the current system. Working in small groups, choose four different groups from the list below:
Large multinational corporations
Low-income households
Public sector workers
Wealthy individuals
Disabled people
Bankers and financial institutions
Students and young people
People working in unpaid care
Using what you learned in the section, create a short explanation of how each group is either harmed or protected by austerity. Then discuss:
What patterns do you notice?
Why might some groups have more influence over state decisions than others?
What would a fairer system look like?
Optional: Turn your group’s insights into a mini-poster or infographic.
Option 4: Exploring alternatives
Time: 40 minutes
This section showed that austerity is not the only option. In this activity, you’ll explore what some alternatives might look like.
Individually or in pairs, imagine that your state wants to recover from an economic crisis, but without using austerity. Your task is to write a short 'recovery plan' (about 150 words) that includes at least three of the following alternatives mentioned in the section:
Fairer taxation (e.g. raising taxes on the wealthy or large corporations)
Closing tax loopholes or reducing tax avoidance
Borrowing for public investment
Spending on education, healthcare, or green energy
Strengthening the commons or households
Supporting small businesses or cooperatives
Once your plan is written, exchange with a partner or present in small groups. Ask each other:
How does your plan support social and economic wellbeing?
How does it avoid the harms of austerity?
What challenges might your plan face?
Option 5: Germany’s debt brake—what does it really limit?
Time: 40 minutes
Read the short case study below (click the arrow), and answer the questions individually, in pairs or small groups.
Questions:
What was the original purpose of Germany’s debt brake?
Based on what you learned in Section 5.2.1, would you say the debt brake is a real budget limit or a political limit?
Why might the state say there is “no money” for social or environmental investment, but find money for military support?
If you could rewrite the debt brake, what kinds of spending would you allow or limit—and why?
Be ready to share one or two of your answers with the class. If time allows, write a short reflection (100–150 words) explaining your opinion on whether the debt brake should stay, be removed, or be changed.
In 2009, Germany passed a rule called the debt brake (Schuldenbremse) and added it to the constitution. It said the federal state could borrow no more than 0.35% of its gross domestic product (GDP) each year, except in emergencies. This limit was meant to prevent the state from building up debt. However, there is no clear economic reason why this number was chosen.
Over time, the debt brake became a major part of German politics. Supporters said it forced states to spend carefully. But critics pointed out that it restricted investment in important areas like public housing, schools, renewable energy, and transport, especially when interest rates (the cost of borrowing money) were low.
In the lead-up to the February 2025 elections, Germany’s conservative (CDU/CSU) and liberal (FDP) parties strongly defended the debt brake. They rejected proposals to change the rule for social welfare, green infrastructure, or climate protection. They argued that Germany must stick to financial discipline.
But after the elections, things changed. As security concerns grew and U.S. support for Europe declined, the new leadership under Friedrich Merz pushed for a major increase in defence spending. In March 2025, Germany changed the constitution so that military spending above 1% of GDP would be excluded from the debt brake. The state also created a €500 billion investment fund for infrastructure—also outside the regular budget.
These decisions led to heated debate. Why was it possible to break the debt brake for military spending, but not for public services or climate action?
Ideas for longer activities and projects are listed in Subtopic 5.5
Checking for understanding
Checking for understanding
Coming soon!
Further exploration
Further exploration
Topic 6: Money and finance (coming in late spring 2025) will explore more finance issues
The Real Waste That Elon's DOGE Should Cut - A short video criticising the spending cuts being taken by Elon Musk’s Department of Government Efficiency in the United States in 2025. The video highlights how businesses and billionaires avoid paying their fair share of taxes while public services benefitting ordinary people face cuts. Difficulty level: easy
Finding the Money - A documentary that explores how money is created and spent by governments, challenging common myths about public debt and austerity. It introduces Modern Monetary Theory (MMT) and questions why governments claim they "run out of money" while essential services are underfunded. Difficulty level: medium
How Economists Invented Austerity & Paved the Way to Fascism - a 16 minute video with economist Clara Mattei where she argues that austerity is not merely an economic policy aimed at balancing budgets or reducing debt, but a political tool used to maintain the power of elites and suppress challenges to capitalism. Difficulty level: high
Corporate Tax Rates Around the World - A global database from the Tax Foundation that provides corporate tax rates for countries around the world. Difficulty level: medium
The Invisible Doctrine: The Secret History of Neoliberalism - A film and a book about the origins and development of neoliberalism by Guardian columnist George Monbiot and Peter Hutchison. Austerity policies are a key part of neoliberal ideology. Difficulty level: medium
The Big Myth of Government Deficits - Economist Stephanie Kelton challenges the common belief that government budgets operate like household budgets. Using clear, relatable examples, she explains Modern Monetary Theory (MMT) and how government spending works differently from personal finances. Difficulty level: medium
Sources
Sources
Alderman, L. (2018, July 22). Portugal dared to cast aside austerity. It’s having a major revival. The New York Times. https://www.nytimes.com/2018/07/22/business/portugal-economy-austerity.html
Chang, H. (2014). Economics: The User's Guide: A Pelican Introduction. United Kingdom: Penguin Books Limited.
Chang, H. (2010). 23 Things They Don't Tell You About Capitalism. United Kingdom: Penguin Books Limited.
Dowling, E. (2021). The Care Crisis: What Caused It and How Can We End It?. Verso.
Filip, D. et al. (2024, December 3). Greece, Ireland, Portugal and Cyprus: Crisis and recovery. European Central Bank. https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog20241203~5d969f5a3b.en.html
Gomes, J. (Host). (2018, August 1). Portugal's economic recovery: How much came from ditching austerity? [Audio podcast episode]. In Knowledge at Wharton. Wharton School of the University of Pennsylvania. https://knowledge.wharton.upenn.edu/podcast/knowledge-at-wharton-podcast/portugals-economic-recovery-how-much-came-from-ditching-austerity/
Graeber, D. (2011). Debt: The first 5,000 years. Melville House.
Johnston, J., & Vasic-Lalovic, I. (2023, September 19). Ecuador: A decade of progress, undone. Center for Economic Policy and Research. https://cepr.net/publications/ecuador-a-decade-of-progress-undone/
Kelton, S. (2020). The Deficit Myth: How to Build a Better Economy. Hachette.
Klein, N. (2014). The Shock Doctrine: The Rise of Disaster Capitalism. Penguin Press.
Mattei, C. E. (2022, October 8). Don't be fooled: Policymakers are quietly invoking austerity by other names. The Guardian. https://www.theguardian.com/commentisfree/2022/oct/08/us-policymakers-austerity-by-other-names
Parvez Butt, A., et al. (2023). Radical pathways beyond GDP: Why and how we need to pursue feminist and decolonial alternatives urgently. Oxfam Great Britain. https://policy-practice.oxfam.org/resources/radical-pathways-beyond-gdp-621532/
Reardon, J. (2018). Introducing a new economics: Pluralist, sustainable, & progressive. Pluto Press.
Staveren, I. van. (2015). Economics after the crisis: An introduction to economics from a pluralist and global perspective. Routledge.
Stiglitz, J. E. (2013). The price of inequality: How today’s divided society endangers our future. W. W. Norton & Company.
Varoufakis, Y. (2017). Adults in the room: My battle with Europe’s deep establishment. Bodley Head.
Terminology (in order of appearance)
Terminology (in order of appearance)
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