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Overlooking these dynamics results in biased projections.
6
Therefore, we project the effects of fiscal adjustment on growth and employment using the United Nations Global Policy Model, which is based on
more realistic assumptions.
7
First, it recognizes the importance of government spending as a source of aggregate demand and the fact that financial flows are not necessarily transformed into productive
investment. Secondly, it recognizes the importance of international feedbacks. When a government cuts spending, the immediate negative impact on the country’s growth leads to a reduction of imports that
harms other countries’ exports and GDP. If the country is relatively small, the effect on the rest of the world may be marginal. But when a country is large, as the United States or China, or when many
governments cut their spending simultaneously, as in the European Union, the effects on the rest of the world are likely to be large and have repercussions on each country’s exports that further depress
economic activity. In our five-year projections we compare two different scenarios: a baseline scenario in which we assume
no fiscal adjustment and a scenario in which we assume that government spending is cut according to Table 1 without any compensatory change in tax rates.
8
Our results contradict the prevailing view that sees confidence in financial markets as the critical driver of real economic activity. Global austerity
appears as a counterproductive strategy leading to lower growth and employment in every region of the world.
6
See Blanchard and Leigh 2013 for the latest admission to this bias in IMF projections.
7
For a technical description of the model see Izurieta and Cripps 2014. For other applications see UNDESA 2010, 2011, 2012, UNCTAD 2013, 2014 Capaldo 2015 and Capaldo and Izurieta 2015.
8
For more details on projection results see Annex 5.
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4.2 Projection Results
Results are summarized in Table 13 Table 13: Impact of Fiscal Adjustment on GDP and Employment compared to baseline, 2015-2020
GDP Employment
Units Jobs millions
All Countries:
High Income -4.98
-4.75 Upper-Middle Income
-7.62 -4.39
Lower-Middle Income -2.60
-0.14 Low Income
-6.17 -2.45
Developing countries:
Eastern Europe and Central Asia -3.73
-0.39 Middle East and Northern Africa
-3.67 -0.71
Sub-Sahara Africa -4.92
-2.46 East Asia and Pacific
-11.58 -2.60
South Asia -2.66
-1.06 Latin America and the Caribbean
-2.43 -0.54
World -5.57
-11.73 Sou
rce: Authors’ analysis based on Global Policy Model; differences between five-year GDP growth rates, under baseline and under spending contraction.
Over the period 2015-20 upper-middle income countries are projected to bear the largest relative loss with a reduction of GDP of more than 7.5 percentage points compared to the baseline. In other words, after
five years of fiscal adjustment, GDP will be approximately 7.5 per cent lower than it would be if fiscal adjustment were not implemented. Low-income countries are the second hardest hit with an overall loss
of more than 6 per cent percentage points over five years. In the same period, high-income countries are projected to lose approximately 5 per cent. Lower-middle income countries will bear the smallest relative
loss, approximately 2.5 per cent of GDP. The geographical distribution of the losses borne by developing countries indicates that the East Asia and
Pacific region will be the hardest hit, with a loss of more than 11 percent of GDP. The impact in this region is strongly affected by China, projected to lose approximately 13 percent of GDP compared to
baseline. Sub-Saharan Africa will be the second hardest hit. Eastern Europe and Central Asia and the Middle East and Northern Africa are close behind with losses amounting to almost 4 per cent of GDP. At
approximately 2.5 per cent of GDP, losses in South Asia will be smaller but still significant. Annual growth figures show a consistent pattern Figure 7 with fiscal adjustment setting every region on
a lower path. However, annual figures
—indicating losses in the order of 1 per cent—may obscure the extent of the total effect. Over five years these losses cumulate leading to the more visible figures
summarized in Table 13. For the global economy as a whole, the total GDP loss is projected to be as large as 6 per cent points compared to the baseline scenario. Under the assumed fiscal adjustment, global GDP
is projected to grow 9.4 per cent by 2020, compared to 15 per cent in the baseline. As an additional illustration, Figure 8 includes IMF global growth projections. Compared to the latter, the assumed fiscal
adjustment implies a loss of seven points, a massive sacrifice in terms of growth over five years. Based on
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an estimated global GDP of US100 trillion in PPP terms, this comparative loss amounts to approximately US7 trillion over five years, enough resources to eliminate the infrastructure gap in
developing countries World Bank, 2013. The negative impact on growth will also affect employment. In fact, GDP losses and employment losses
are mutually reinforcing. As cuts to government spending reduce aggregate demand, corporate sectors in each country face losses of business that lead to layoffs and salary cutbacks. Meanwhile, in order to cut
spending, governments must introduce hiring andor wage freezes, or outright employment cuts in public services. These effects
—in both the private sector and the government—reduce workers’ disposable incomes negatively affecting consumption expenditure and investment. Lower consumption and
investment feedback negatively onto business activity in a spiraling process that leads to employment losses and slower growth.
We project net employment losses across all income groups against the baseline scenario. High-income countries will be the most affected with a loss of 4.7 million jobs. Upper-middle income countries follow
close behind with a loss of 4.4 million jobs, while low-income countries face a loss of 2.4 million jobs. In total, we project that fiscal adjustment will cause the loss of 7 per cent of global GDP and of
approximately 12 million jobs over the 2015-20 period.
