Unbalanced financial stimulus followed by fiscal austerity: When will the IMF learn from its mistakes?!

8 December 2022

Anti-austerity protest in Dublin (Ireland) - 24 November 2012. Credit: William Murphy

Following a decade of austerity after the global financial crisis, the world is heading yet again into another economic recession. Since 2008, both the financial crisis and the Covid-19 pandemic have led to short periods of fiscal expansion, followed by long periods of socially painful fiscal austerity, particularly promoted by IMF through its conditional lending programmes. A report by Isabel Ortiz and Mathew Cummins published in September warned that the dangers of the post-pandemic austerity shock are far more severe this time. Their analysis indicates that in 2021, 134 countries contracted their budgets by 3.5 per cent of GDP, compared to 2.4 per cent in the period following the 2008 financial crisis.

This public spending contraction comes on top of unequal Covid-19 stimulus spending across the globe. A report by Financial Transparency Coalition published in September, highlighted that countries in the Global South provided stimulus measures equivalent to 2.4 per cent of their GDP during 2020-21 compared to an average of 28.4 per cent of GDP in high-income countries. Moreover, the report found that stimulus packages primarily benefited the corporate sector, with approximately 40 per cent of the recovery funds being directed towards large companies. As a result of this inadequate crisis response, both in size and composition of fiscal spending, it is expected that between 75 and 95 million more people globally will fall into poverty in comparison to pre-Covid-19 levels.

The crisis is far from over, with more hardship on the horizon

Ortiz and Cummins’ report, issued as part of a newly launched  #EndAusterity Campaign comprised of 500 civil society organisations (CSOs), highlights that by next year, 85 per cent of the world’s population will live under austerity measures. The intensifying drive toward austerity is worrisome as measures are implemented during new surges of Covid-19, inflationary pressures, as well as food and energy insecurity exacerbated by the Russian war (see Dispatch Annuals 2022; Observer Summer 2022). The most common policies promoted by the IMF involve rationalising social protection programmes; cutting public sector wages and reforming labour laws; reducing subsidies on basic goods as prices hit record highs; and privatising public services resulting in layoffs. The Fund’s failure to support a genuine recovery contradicts statements made by the IMF’s managing director in April about the crisis being an opportunity to “craft a different and better future together.”

Crises oblige countries to rethink policies, and the COVID-19 pandemic is an opportunity to create a new social contract, to prioritize human rights, sustainable development, and political stability, to achieve long-term prosperity for all.Isabel Ortiz and Mathew Cummins

The negative social and economic impacts of austerity are well documented, including by the IMF itselfAcademics and CSOs have also recorded the adverse impacts on poverty, inequality, human rights as well as on jobs and economic activity (see Observer Autumn 2020). Short term, austerity depresses incomes and domestic demand. In the long term, unemployment and excess capacity harm economic activity undermining recovery efforts. Then why is IMF still promoting fiscal consolidation? The intent is to ensure debt sustainability so that countries with IMF programmes can carry out timely loan repayments to their creditors, even to the detriment of citizen welfare – an artificially created trade-off.

While the IMF often argues that austerity cuts are unavoidable, Ortiz and Cummins stress that austerity alternatives exist. Increasing tax revenues can be done through taxing corporate profits, financial activities and wealth. Restructuring existing debt should be possible if the legitimacy of the debt is questionable or the opportunity cost in terms of worsening deprivations of the population is high. Eradicating illicit financial flows and reallocating public expenditure from high-cost low impact investments like defence to those with larger social impacts are alternatives to tackle corruption and the mismanagement of public funds.

At a time of austerity and multiple crises, the need to create fiscal space has never been greater. Ortiz and Cummins highlight that “crises oblige countries to rethink policies, and the COVID-19 pandemic is an opportunity to create a new social contract, to prioritize human rights, sustainable development, and political stability, to achieve long-term prosperity for all.”