This paper provides new causal evidence on the effects of fiscal austerity on productivity using data covering 139 regions from ten Euro Area countries over 1999-2019. We construct a novel utilization-adjusted TFP measure at the regional level that corrects for cyclical variation in capital and labor utilization. We identify exogenous reductions in regional public spending via a Bartik-type instrument that combines pre-accession regional spending shares with narratively identified national consolidation episodes. Our empirical findings reveal a robust pattern - fiscal consolidations contract economic activity while at the same time raising utilization-adjusted TFP significantly and persistently. A one percent reduction in regional public spending raises utilization-adjusted TFP by approximately two percentage points after two years, even as output, employment, and investment contract sharply. The productivity gains are substantially larger than those associated with ordinary recessions and reflect both within-sector improvements, consistent with a cleansing mechanism whereby austerity accelerates the exit of marginal producers, and reallocation of activity toward tradable sectors with higher productivity growth.