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Austerity: The new normal

Added 16 Oct 2019
This new report by Isabel Ortiz and Mathew Cummings is co-sponsored by Initiative for Policy Dialogue, International Confederation of Trade Unions, Public Services International, European Network on Debt and Development (Eurodad), and The Bretton Woods Project.

This working paper: (i) examines historical and projected government expenditure trends for 189 countries; (ii) reviews the latest IMF country reports for countries to identify the main channels used by governments to adjust expenditures; (iii) discusses the negative social impacts of austerity measures; (iv) presents the renewed Washington Consensus advised to governments that are left with limited budgets—and the alternative UN Consensus on Development for All; and (v) calls for urgent action by governments to identify fiscal space to accelerate development, human rights, a green recovery with jobs and inclusive growth, and progress towards the Sustainable Development Goals (SDGs).

Analysis of expenditure projections verifies two distinct phases of spending patterns since the onset of the global economic crisis. In a first phase (2008-09), most governments introduced fiscal stimulus programs and ramped up total spending. Overall, 136 countries (more than 70 per cent of the sample reviewed) expanded spending during 2008 and 2009 by an average annual increase of 3.2 per cent of GDP.

In 2010, however, governments started to scale back stimulus programs and reduce spending in a second phase of the crisis that institutionalized austerity as the new norm, which is expected to continue at least until 2024. The fiscal contraction phase (2010-24) is characterized by shocks in which adjustment deepens, the first occurring in 2010-11, the second taking hold during 2016-17 and the third expected to initiate in 2020.

The forthcoming adjustment shock is expected to impact 130 countries in 2021 in terms of GDP. One of the key findings is that the developing world will be the most severely affected; in 2021, 93 developing countries are projected to cut public spending during the forthcoming shock versus 37 high-income countries. Comparing the 2020-24 and pre-crisis 2005-07 periods further suggests that 69 governments may be undergoing excessive contraction, defined as cutting expenditure below pre-crisis levels in terms of GDP. Turning to populations affected by the upcoming shock, projections indicate that austerity will affect approximately 5.8 billion persons by 2021—about 75 per cent of the global population. For billions of persons, the persistence of a long jobs crisis and austerity mean a deterioration of living conditions.

How are governments achieving fiscal adjustment? What are the main adjustment measures that have direct social impacts? This review of 161 IMF country reports in 2018-19 reveals that the most commonly considered adjustment measures are: (i) pension and social security reforms (in 86 countries); (ii) cutting or capping the public sector wage bill, including the number and salaries of teachers, health workers and civil servants delivering public services (in 80 countries); (iii) labor flexibilization reforms (in 79 countries); (iv) reducing or eliminating subsidies (in 78 countries); (v) rationalizing and/or further targeting social  assistance or safety nets (in 77 countries); (vi) increasing regressive consumption taxes, such as sales and value-added taxes (VATs) (in 73 countries); (vii) strengthening public-private partnerships (PPPs) (in 60 countries); (viii) privatizing public assets/services (in 79 countries); and (ix) healthcare reforms (in 33 countries). Contrary to public perception, austerity measures are not limited to Europe; in fact, many of the principal adjustment measures feature most prominently in developing countries. All these measures have
negative social impacts; the costs of adjustment have been passed to populations, with millions of people being pushed into poverty and lower living standards.

Rather than investing in a robust recovery to bring prosperity to citizens, expenditure projections show that austerity has become the “new normal.” Further, public expenditure adjustment is being used as a Trojan horse to induce Washington Consensus policies to cut back on public policies and the welfare state. Once budgets are contracting, governments must look at policies that minimize the public sector and expand PPPs and private sector delivery, often promoted and/or assisted by multilateral development banks. There are clear winners and losers from the renewed Washington Consensus, and countries must effectively assess the impacts and question who benefits from these policies. The worldwide propensity toward fiscal 
consolidation can be expected to aggravate the growth and employment crisis and diminish public support at a time of high development needs, soaring inequalities and social discontent.

Austerity and the Washington Consensus do not need to be the “new normal.” There are alternatives, even  in the poorest countries. Countries have agreed to an alternative consensus at the UN, a development agenda for all persons. Much of this centers on governments taking advantage of available opportunities to expand fiscal space. There are at least eight options to generate financing resources: (i) re-allocating public expenditures; (ii) increasing tax revenues; (iii) lobbying for aid and transfers; (iv) eliminating illicit financial flows; (v) using fiscal and foreign exchange reserves; (vi) managing debt by borrowing or restructuring existing debt; (vii) adopting a more accommodative macroeconomic framework; and (viii) expanding social security coverage and contributory revenues—for social protection. Given the importance of public expenditures for national development and the attainment of the SDGs, it is imperative that governments and international financial institutions redress austerity and other policies that benefit few, and instead explore all possible alternatives to expand fiscal space to ensure full employment with universal
social protection, inclusive growth, social and green investments, human rights and sustainable development for all.