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Q&A: What is fiscal retrenchment?

Tuesday, April 07, 2009
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Fiscal retrenchment means that a government has to introduce deflationary fiscal measures designed to reduce the amount of borrowing and debt that has been run up during the downturn and economic/financial crisis.

Ultimately fiscal retrenchment can be achieved in one of two ways

(1) Raising indirect and direct taxation

(2) Making cuts in the real level of government spending

Both are painful - tax hikes might choke off a tentative recovery and slashing government spending must hit the availability of public services - but fiscal retrenchment is the inevitable consequence of governments who have lost control of their own finances. The UK government was running sizeable budget deficits even when growth was strong - it forgot to mend the roof when the sun was shining.




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