Are we heading towards an austerity-based recovery?
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Article summary
Notes from Civil Society Policy Forum event on April 13, 2022, which explored how the trend of austerity is materializing across the world and present alternatives for a fair recovery with a focus on taxing wealth.
Summary: In the third year of the pandemic, we are seeing a sudden and worrying roll back of crucial fiscal support that earlier helped cushion the devastating impact of the crisis with countries now adopting austerity measures before the pandemic is even over. Through its advice and conditionality, new evidence reveals the IMF is encouraging many countries down this path which consistently undermines the lives, rights and wellbeing of those most vulnerable. From Tunisia to Argentina, from Zambia to Nigeria, this panel will explore how the trend of austerity is materializing across the world and present alternatives for a fair recovery with a focus on taxing wealth.
Sponsors: Center for Economic and Social Rights, Oxfam, Fundación SES, Bawsala, Bretton Woods Project, Latindadd, Arab Watch Coalition, WEMOS, ActionAid, Christian Aid, Third World Network.
A video recording of the event can be found here.
- Moderator: Kate Donald, Director of Program, Center for Economic and Social Rights
- Nadia Daar, Head of Washington DC Office, Oxfam International
- Lionel Stiglitz, Research Coordinator, Fundación SES
- Amine Bouzaiene, Fiscal Policy Lead, Bawsala
- Paolo Mauro, Deputy Director, Fiscal Affairs Dept, IMF
Kate Donald:
- At beginning of the pandemic we saw fiscal stimulus – much higher volume in HICs, as LICs have much less fiscal space. Now seeing turn back to fiscal contraction, supported by the IMF. According to Oxfam analysis, 85% of Covid loans indicate plans to undertake austerity once most severe health crisis abates. On a backdrop of already cut back social protection & health systems, turn away from universalism. Example Ecuador – weakness of public health system result of 6 years of austerity, massive cuts even in recent years. Ortiz & Cummins research shows post-pandemic austerity shock in up to 159 countries. On top of that, Russian invasion in Ukraine, impact on food and fuel, cost of living, esp. in Global South. In SSA and SEA, share of income spent on food may go up to 30%, in MENA also double to 20%. Human impacts can’t be overstated. Cost of living crisis, climate crisis, sovereign debt crisis.
- How will government respond to this? Will we see wage freezes? Yet narrower targeting of social protection? More subsidies to fossil fuel industries? Or will we see an universalist approach to protect people’s livelihoods through counter-cyclical and gender-responsive spending?
- How can IMF best support governments to create enabling environment for human rights in this context?
Nadia Daar:
- Want to start by adding to context. Oxfam released today that as result of combined crises of Covid, inequality, food & fuel crisis, over quarter of a billion more people could be pushed into extreme poverty this year. When you broaden out the picture, we see billions living on less than 5.5 USD per day.
- Only 11% in LICs fully vaccinated, vs. 74% in rich countries. Roll back of support measures, overwhelmed with debt programs. Debt 2.2x education spending, 20x social protection spending, 8x health spending.
- Seeing governments imposing austerity – history shows us this will cause misery for millions, set us on path of unequal recovery. Will also put countries & people in precarious position to face next crisis.
- IMF played pivotal role at onset of pandemic: flexible clauses in programs, rapid emergency financing, urged countries to spend what they needed to, rallied donor support for CCRT, historic SDR allocation. These were in line with MD’s message “countries need to spend”
- April 2021 Fiscal Monitor called for progressive taxes to fund recovery & tackle inequality. We were hoping this would signal a shift, but hasn’t translated into country policy recommendations.
- Oxfam tracked financing since beginning, read every single loan document. In first year, in 85% encouraged austerity once health crisis abates. Types of measures we saw: freeze wages, remove subsidies, raise VAT. On the other hand, recommendations on progressive tax measures were scant.
- Next week will publish updated analysis: IMF shifted away from conditionality-free emergency financing, back to traditional programs. Are extremely distressed that the push for austerity is now a requirement in a large number of loan programs, including countries facing major hunger crises.
- Analysis of Article IVs similar trend: IMF is advising austerity in every single African country’s Article IV apart from one. In Nigeria encouraging authorities to further increase VAT. We are nowhere close to being out of this pandemic. This type of advice could be catastrophic for poverty & inequality. Nothing on revamping tax systems to shift burden on those who can afford it: corporations and high incomes.
- Price of basic basket of items in Kenya has increased by 20%, households spending 30% of their budget on food. It’s just not the time for pro-cyclical fiscal policy, scrap social protection, increase VAT. Need to invest in health, social protection.
- What the IMF says and does carries weight and power. In next 4 years, 14 West African countries already plan to cut public spending. In Sierra Leone, 860m USD cutes until 2026 (2.5x annual healthcare budget). IMF needs to translate its rhetoric into its programs.
- What can the IMF do?
- Suspend conditionalities under existing programs, esp. in countries impacted by Ukraine war.
- Mobilize remaining arsenal of 800 bn USD for continued emergency loans, through PRGT and RST
- Mobilize advice & technical assistance to empower countries to raise taxes on the richest individuals (temporary and permanently) – 2% progressive personal wealth tax on millionaires could generate over 2TN USD worldwide
Kate Donald:
We will now look at two specific country contexts with recent experiences: Argentina and Tunisia.
Lionel Stiglitz:
- History of IMF Argentina program. Inconsistencies in the design, admitted by IMF, motivation was political to prop up market friendly Macri government. Financed massive capital flight. Renegotiation over past years failed.
- What was negotiated in the EFF? Fiscal deficit reduction, inflation deceleration, monetary tightening.
- Inflation: IMF maintains monetary approach, but rising food prices jeopardize goals. Devaluation paired with inflation promotes renewed inflation.
- Fiscal deficit: why not focus on taxation (revenue) instead of cuts? Cut to fiscal deficit of 2.5% GDP this year and 1.9% in 2023.
- Monetary tightening: international rate rises will lead to more capital flight & speculative capital inflows. If government is forced to raise money in internal debt market and can’t get help from the central bank, what will be the equilibrium rate?
- These goals will not be achieved. 2023 is election year. IMF plays political role after being co-responsible for failed program and massive capital flights, violation of Article 6. Argentine Congress has proposed tax on undeclared foreign wealth, think 70bn can be raised – will IMF and US help with this?
- Huge deficits financed by central banks in HICs, while developing countries are not allowed to do the same. So, this is not just a technical question but political as well.
Amine Bouzaiene:
- In the case of Tunisia, important to state that even though pandemic was a shock, it only amplified decades-long issues rooted in a poor development model promoted by IFIs in the form of structural adjustments. Social unrest started in 2011 and got rid of 23 years of dictatorship, testifying to failure of economic model. But things got worse in 2011 because of 3 agreements between Tunisia and IMF. Deepening inequality as a result.
- More than 12% of budget has to be financed by external borrowing. That’s why current negotiations are vital. Of course, government has optimized its chances by aligning IMF conditions so there is no real public investment in the pipeline.
- Fiscal policies recommended by IMF and implemented by Tunisian government are what led to the current situation. Would like to place Tunisia in the global context – in neoliberal revolution in 1980s there was a dramatic drop in taxation rates, structural adjustment. Before we had progressive tax rate, spread tax burden across society, with higher marginal rates of 60% for high earners. IMF suggested cutting this and focusing on middle class for tax recovery, recommended reducing tax on the rich.
- After revolution, IMF continued to support tax pressure on middle class and ridiculously low tax rate on high incomes. The wealthiest 1% of Tunisians own 11% of national wealth. Decrease in tax on corporations of 5%. Therefore, only 10% of government income from this, less than personal income tax. IMF is defending tax reductions, saying it will help expand the base and reduce informal economy and encourage investment. Result of these policies show they have led to historic drop in revenue.
- As you can see here (on slides), this has not attracted investments, they have dropped. This is only the tip of the iceberg. The path pursued by IMF is one of tax competition with many tax breaks and incentives that have put Tunisia in a position to not be able to mobilize any additional revenue. We found that 4 out of 5 investments would have taken place anyway, so these “incentives” were not needed.
- All the tax reductions have been compensated by increased VAT and consumption taxes that now represent the highest share of tax income.
- Tax fraud is a global problem, but a result of the ideology imposed by the IMF. 25bn dinars is what tax fraud costs our country – ¾ of our tax income is lost every year. Tax administration in Tunisia lacks resources, is unable to raise and collect taxes. Even though the data is from 2013, no further people have been hired since then. Many companies do not declare their income (correctly) and do not pay their taxes.
- Country has lost its capability to rely on its own resources
- Do not have lever for redistributing wealth
Kate Donald: Think this is an extreme example of what we have seen in many countries – loopholes, VAT, cuts for corporations and wealthy individuals. Will hand over now to Paulo to respond to these concerns.
Paolo Mauro:
- Share a lot of the concerns about the fiscal challenges. Would characterize the context & IMF’s approach differently, but want to emphasize that it’s important that civil society hold us accountable.
- On global context: we live in a very uncertain context. Would all like to say that pandemic is on its way out, but it is still with us. Even in advanced economies, even though the recovery seems to have started. Most importantly, many countries don’t have sufficient vaccinations, need to keep the attention on that. Lots of uncertainty. Just as recovery started, Russia invaded Ukraine – now higher food & energy prices, inflation even more, high debt (public & private). As countries like US that are at core of global financial system begin to increase interest rates, will put pressure for capital outflow from emerging markets. If you look at LICs, more than half are already in debt distress or at high risk of it.
- All of that put together, have real concerns of possibility of social unrest very high. Even prior to pandemic saw it in France, Chile, likely to come back. Seen some in Peru, may happen elsewhere – food, energy prices, really hurts household budgets.
- Policy priorities: At the outset of the pandemic, we said support people at first. We didn’t use the word “stimulus”, want to support people when they were forced to stay at home, and firms not to go bankrupt. “Spend what you must but keep the receipts”. Now a lot of work to check if countries spent money appropriately. Now we still need to support people, commensurate with 3 conditions: Stage of pandemic, pace of recovery in country in question, and consistent with country’s ability to finance itself with reasonable cost.
- Massive increase in expenditure in HICs as they were able to finance themselves with reasonable cost – not the same for LICs. Heard use of the word “austerity” – it is a loaded and imprecise term. The best we can do is look at numbers. One important consideration is we will see large decreases in fiscal deficits, because economic recovery in HICs will bring more revenues. Some decline in spending is simply automatic recovery. Many countries are now unwinding exceptional support measures – mainly advanced economies. So advice we provide now especially in advanced economies is to unwind this support and make it more targeted. Our standing advice has been to mobilize revenue as progressively as you can, and spend efficiently – especially where investment will be supportive of economic growth and inclusion of communities that have to be linked to more modern sectors of the economy.
- Food and energy prices most pressing issue right now – should prioritize food security and basic energy needs. In general, best policy is pass through of international to domestic prices, combine with conditional cash transfers and social safety nets. Maintain incentives for producers & distributors not to create shortages. But can only be applied in countries with advanced institutional setup. Have seen major progress on conditional cash transfers and SSN, e.g. Togo using mobile phones, but reality is that countries are using price caps, additional subsidies that are costly and not well-targeted, and other price-distorting measures. Recommend being gradual in pass-through of food prices and cooking fuels. Discounts on utility bills, lifeline on electricity, gas for cooking. Open to distribution of in-kind staple foods.
Final comments & Q&A:
Lionel Stiglitz: Out self-financing ability is compromised because we lost 100bn dollars to capital flight with support of IMF. So this ability is not endogenous, it has links to international financial system.
In my presentation I asked about IMF’s view on taxing offshore wealth – would appreciate a response by the IMF representative.
Nadia Daar: Wanted to respond on that austerity is loaded and the need to look at numbers. The big concern is exactly about the figures, required fiscal consolidation targets and types of measures countries need to adopt to meet them. Those are specific policies we’re worries about. You said this was crucial at the beginning of the pandemic, now the situation has practically worsened, but then we’re back to these fiscal consolidation targets. How is the IMF advising specifically to avert the crises we are facing today?
Amine Bouzaiene: Want to make some suggestions, would like to hear from Paulo which ones are good or bad. Tax progressivity with higher rate for higher incomes. Corporate income tax. Tax extraordinary corporate profits of companies that got richer in the past 2 years. Streamlining tax benefits to only maintain those with real measured impact. Hiring 500 tax comptrollers.
Paolo Mauro: The kind of things you mentioned (Amine) would be the options we would look at – types of taxes, tax administration, VAT vs. other taxes, tax evasion. Let me defend VAT – it is a fantastic way of collecting revenues in an efficient way that can be redeployed for progressive measures. Personal income tax is progressive in all countries – my own recommendation is not to have a flat rate, but a staggered system. This is a political choice that rests with government, as mission chief don’t want to dictate political choices of the country. Property taxes important. Avoiding tax evasion is part of IMF’s technical advice. Important that people can’t park their money in other countries, exchange of information is something we are encouraging. Recruiting more administrators is a great idea.
On the financing side – trying to replenish CCRT and PRGT, and are exploring SDR channeling and RST.
Kate Donald: Efficiency is not the only principle for tax collection – for many years, feminist economists have made the point that there are distributional and equity impacts as well. If you don’t collect taxes progressively, you undermine your own goals of progressive spending.
Would like to hear more about how findings from IMF’s own research & analysis translates into programs – have seen some very good research come out, but then it is not implemented in practice.
Chiara Mariotti (Eurodad): Taxation is a key pillar of the social contract. VAT is not a great type of tax to reinforce the social contract.
We use the term austerity because it is loaded – it is a very political policy. It creates winners and losers. Even if we agree we don’t want debt to explode and understand at some point cuts need to be made, it should not happen now when we are still in the middle of the crisis.
Paolo Mauro: Mastering domestic resources is crucial. Trading off this against cost of debt crisis and inflation. We are trying our best to include in programs and surveillance the analysis of flagship publications. Have a strong internal review process. Where the rubber hits the road is financing – have to make trade-offs. Can do the analysis on all these topics but at the end of the day, budget is the constraint.
Amine Bouzaiene: VAT can be efficient, but it is regressive, and when we look at its history, the use of this has been compensated with cuts to other taxes. We have the capacity to implement progressive taxes, will allow us to mobilize more resources. It’s not just up to us. There is high external debt, it is suffocating and there is no exit. Need to put this on the table and need to talk about a debt moratorium.
Lionel Stiglitz: Why don’t we create the conditions in the international financial system to allow countries to recover. We point the finger to countries’ capacities, when they are being undermined by the system. Role of US and IMF in international financial system, what we have to discuss is not a technical issue but a political one. If IMF is supposed to stabilize the international situation, it has to make changes to allow countries to recover.
Nadia Daar: 2 key points.
- Not wanting to impose IMF views on countries. We urge the same! Let go of conditionality-based financing, make sure policies have support from people and civil society. Should include civil society more, transparency in program negotiations.
- Social unrest. IMF carries responsibility for how things evolve politically in countries. The economic and political situations are intimately connected – if you continue to allow tax evasion and pushing the burden on poor people, social unrest will result. So I urge you: push progressive taxation harder than pushing VAT. This is more important than food prices. Solidarity wealth tax in Argentina worked really well. Need to see the IMF fundamentally thinking about distributional impacts of its policies.
Chat Questions & Comments:
- Jon Sward (BWP): How will the IMF ensure that fiscal consolidation targets are not working at cross purposes with the IMF’s new Resilience and Sustainability Trust – given that large public investments will be needed to meet global climate goals in the areas of mitigation, adaptation and ‘transition management’?
- Nabil Abdo (Oxfam): VAT is lauded as an efficient tax for countries that do not have strong capacities and administration, however we see the IMF having several programs with one country for nearly a decade, and yet they still don’t have capacity for more progressive taxes, does this mean that IMF capacity building on this front still lags?
- Matti Kohonen (Financial Transparency Coalition): Fiscal consolidation is not actually automatic, it only happens if the government can’t raise progressive taxes from the individuals and businesses and if it cannot manage its debt. Also, social protection expansion creates a virtuous circle, where the economy keeps running with greater multipliers. Cutting social protection means economy stands still in a crisis, as we saw in South Africa withdrawing its SRD grants led to riots and recession last year. Progressive taxes / financial transparency / taxing corporates is not political, it is technically also the best choice to recommend.
