From Fiscal Stimulus to Fiscal Contraction
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IMF, 2010b. Reforms of pension and health entitlements were called for, accompanied by ―strengthened safety nets‖ for the poorest IMF, 2010a, pp. 15-32. On the composition of fiscal adjustment, it was
advised that most of it could come from:
Unwinding the previously adopted fiscal stimulus packages;
Reforming pension and health entitlements to reduce the long-term financial obligations of the state by way of avoiding ―a rise in spending as a share of GDP‖ IMF, 2010a, p. 16;
Containing other spending, by means such as eliminating subsidies; and
Increasing tax revenues. All these suggested reforms became mainstream policy advice in a majority of countries around the world
after 2010 and shaped the direction embraced by the economic adjustment programmes agreed with countries facing a sovereign debt crisis. Other international institutions also played a role. The Bank of
International Settlements BIS
—the bank for central bankers—joined the IMF in advocating front-loaded fiscal consolidation and structural reforms claiming that the limits to fiscal stimulus had been reached in a
number of countries BIS 2010 and 2011. The OECD 2010 Economic Outlook OECD, 2010 also focused on the urgent need for fiscal consolidation and structural reforms in, for example, labour and
product markets, pointing out that in both OECD and non-OECD countries the economic slack was disappearing and recovery taking hold rapidly. While these positions generally focused on higher-income
countries, they also urged fiscal adjustment in developing countries, given that the risk of debt distress was increasing there too. However, as the global policy reversal was completed, it became apparent that
recovery was not under way
in the world’s largest economies. Instead a pattern of slow growth and persistent unemployment seemed to settle in, partly due to fiscal consolidation itself.
Thus the second phase of the crisis, beginning in 2010, saw a total policy reversal, a 180-degree shift in governments’ public expenditure. The sovereign debt crisis in Europe turned public attention to
government spending, as if it were the cause of the crisis. Rising debts and deficits at this point resulted from bank bailouts to rescue the financial sector from bankruptcy, stimulus packages and lower
government revenues due to the slowdown in economic activity Figure 5. In other words, government debt and deficits were symptoms of the crisis, not its cause. Yet fiscal consolidation prescribed to cut
back on public policies and downsize state budgets as the main ways to reduce deficits, calm the markets and revive the economy. Following this logic, the social welfare state was depicted as unaffordable and a
burdensome impediment to competitiveness and output growth.
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Figure 5: Support for the Financial Sector, Fiscal Stimulus Packages and Public Debt Increases, selected high income countries, 2008-10 US billions
Note: North America includes United States and Canada; Europe includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, the Netherlands, Poland, Portugal, Spain, Sweden and the United Kingdom
Sources: ILO 2014, based on IMF, 2010c; IMF, 2013; Stolz and Wedow, 2010
The reasons for the quick, deep and prolonged cuts to public spending in developing countries are less clear
. The IMF’s role in influencing policy through surveillance appears as a main contributing factor Islam et al 2012; Molina 2010; Van Waeyenberge, Bargawi and McKinley 2010; Weisbrot and
Montecino 2010.
4
Numerous studies highlight the fallacious basis of austerity programs CESR 2012, ILO 2012 and 2014, Krugman 2012, Stiglitz 2012, UNCTAD 2011b, United Nations 2013, Weisbrot and Jorgensen 2013,
etc.. In the short term, austerity depresses incomes and hinders domestic demand, harming economic activity and employment and ultimately undermining recovery efforts. In the long term, as unemployment
and excess capacity persist, potential output may decrease. Even recent research at the IMF acknowledges that fiscal consolidation has adverse effects on both short and long-term unemployment, private demand
and GDP growth, with wage-earners hurt disproportionately more than profit- and rent-earners Guajardo, Leigh and Pescatori 2011; Ball, Leigh and Loungani 2011. Furthermore, IMF Chief Economist Olivier
Blanchard admitted to serious underestimation of these negative effects in calculations used to argue in favor of fiscal contraction Blanchard and Leigh 2013. However, IMF operations have not yet reflected
these findings. In both high-income and developing countries, there is a strong need to continue countercyclical policies
and higher public spending to avert recession, revitalize the economy, generate productive employment, support development needs and repair the social contract. The present contractionary policy stances fall
short of what is needed for economic recovery and addressing the jobs crisis. Employment creation is
4
It is important to note that few governments actually have IMF programs, and the IMF’s influence of global and national policy debates is mostly through its policy advice and surveillance missions, the so called ―Article IV consultations.‖ These are carried
out annually in nearly every country and provide recommendations on a broad range of issues, from fiscal, monetary and exchange rate policies to pensions, healthcare systems, safety nets, labour policies, among others, despite the fact that social
policy is not in the IMF’s mandate.
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associated with a different set of macroeconomic policies that promote investment in productive capacities and growth of aggregate demand, coupled with adequate social policies Epstein 2009; ILO
2009a, 2010a, 2010b and 2012; Ocampo and Jomo 2007; Pollin, Epstein and Heintz 2008; United Nations 2009a and 2013; UNCTAD 2011a and 2011b; Weeks and McKinley 2007. Further, the focus on fiscal
balances deviates public attention from the unsolved root cause of the crisis, which is excessive deregulation of financial markets, as well as from logical global solutions, like a sovereign debt workout
mechanism that deals fairly with both lenders and borrowers UNCTAD 2011a. The United Nations 2009a, 2009b, 2012 and 2013 has repeatedly called for forceful and concerted policy action at the global
level to promote employment-generating growth, financial market stability and support development.