Social services


IMF rhetoric and practice on public sector wage constraints: Advice to slash spending continues despite Covid-19 pandemic

29 September 2021 | Guest analysis

A man undergoes a Covid-19 test in Ecuador. Credit: CarlosE Video/Sutterstock

Over 15 years ago, ActionAid documented the impact of public sector wage bill caps imposed by the IMF as an explicit condition of loans in low-income countries, showing how they blocked progress on education and on responses to HIV/Aids. After three years of consistent research and advocacy, the IMF backed down and removed public sector wage bill caps conditionality in its loan programmes worldwide in 2007. The IMF executive board at the time said that it, “welcomed the declining incidence of such ceilings in Fund-supported programs,” and hoped to dispense with them entirely, in the meantime using them only “in exceptional cases.”

This dramatic policy shift, questioning one of the pillars of austerity, occurred at a time when the IMF faced diminishing influence and legitimacy – just before the financial crisis of 2007-2008, which re-emboldened the institution. Since then the IMF has rebuilt its power and it has cast aside its aspiration to dispense with the use of wage bill constraints, making routine use of them as a central part of its coercive policy advice. ActionAid’s Who Cares for the Future report, released in April 2020, showed that the IMF recommended that governments either cut or freeze public sector wage bills in 78 per cent of countries – over the previous three years. This rose to 90 per cent when we revisited the data in October 2020, as shown in the report The Pandemic and the Public Sector, which looked at the initial impact of Covid-19 on public spending. Despite a shift in rhetoric during the pandemic, country level practice remains largely unchanged and a rapid return to austerity, including wage bill constraints is now predicted for 85 per cent of the world’s population (see Observer Autumn 2020).

New ActionAid research shows IMF’s dogmatic approach to wage bill cuts continues

ActionAid’s new investigation in 2021 looked at IMF country documents over a five-year period, combined with in-depth research across ten countries. Published on 12 October in a report called The Public versus Austerity, we show that the use of public sector wage constraints is both blunt and ineffective, often damaging the very sectors that governments claim they want to protect. Despite the Fund arguing that ‘exemptions’ are routine for education and health personnel, we found no evidence of this in two-thirds of the countries studied. Given that teachers and health-workers are usually the largest two groups on the wage bill, overall cuts cannot be delivered without impacting them – and at best ‘protection’ of these meant a freeze, whilst even deeper cuts were made in other sectors.

The IMF claims that public sector wage constraints are only ever short-term measures, but in the countries studied, we found every country faced a consistent cut or freeze for at least three years and most countries for five or six years.

The IMF claims that public sector wage constraints are only ever short-term measures, but in the countries studied, we found every country faced a consistent cut or freeze for at least three years and most countries for five or six years. There was no consistent advice given to countries to ensure that measures would indeed be temporary – for example on how to increase fiscal space by raising tax revenues. And even where countries did raise tax revenues significantly, those countries were not advised to increase spending on the public sector wage bill.

ActionAid’s latest research found that there is no guideline or consistency on what percentage of GDP a country should sensibly spend on the public sector wage bill, with this ranging from 13 per cent to 2 per cent in the countries studied. Every country was urged to cut or freeze regardless of whether they were above or significantly below regional and global averages. There is almost no reference made in these documents to the shortages of health and education workers that are evident in most countries and no clear attempt to assess the impact of any constraints. Much of the data that the IMF claims to have used in offering advice remain secret, making it hard to contest any conclusions.

One of the most striking findings of ActionAid’s latest research is that multiple IMF documents suggested countries needed to cut social spending in order to increase social spending. That is, you need to cut recurrent spending in order to increase capital spending on buildings and equipment. Most people would see nurses or teachers as key items of social spending but not the IMF. In fact, a focus on infrastructure moves resources away from health and education (which have large recurrent budgets) towards other sectors which depend more on capital spending (roads, energy, water). This also diverts resources from the public sector (frontline workers) to the private sector.

The use of public sector wage bill constraints is not based on evidence, is profoundly blunt and often has unintended impacts, so why are the IMF and many Ministries of Finance still so keen? We conclude there is an unconscious bias against the public sector, one rooted in a fundamentalist ideological position and an attachment to what might be best called the ‘cult of austerity’. There are so many economic alternatives being explored by so many actors – including in the IMF headquarters itself.  But these are not trickling down to IMF staff involved in country level processes. Now is the time to stop the cult of austerity and actively pursue the plethora of alternatives – to reimagine the public sector workforce as a key engine of national development in light of Covid-19 and the climate crisis.