The Decade of Adjustment: A Review of Austerity Trends 2010-2020 in 187 Countries (Extension of Social Security Series)

Organization(s): ILO
Author: Isabel Ortiz, Jeronim Capaldo, Kalaivani Karunanethy, Matthew Cummins
Year: 2015
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This paper: (i) examines the latest IMF government spending projections for 187 countries between 2005 and 2020; (ii) reviews 616 IMF country reports in 183 countries to identify the main adjustment measures considered by governments in both high-income and developing countries; (iii) applies the United Nations Global Policy Model to simulate the impact of expenditure consolidation on economic growth and employment; (iv) discusses how austerity threatens welfare and social progress; and (v) calls for urgent action by governments to adopt alternative and equitable policies for socio-economic recovery.

Analysis of expenditure projections reveals that there have been two distinct phases of government spending patterns since the onset of the global economic crisis. In a first phase (2008-09), most governments introduced fiscal stimulus programs and ramped up public spending. In 2010, however, premature budget cuts became widespread, despite vulnerable populations’ urgent and significant need of public assistance. The second phase of the crisis is characterized by two major contractionary shocks, the first occurring in 2010-11 and the second taking off in 2016 and lasting at least until 2020.

The forthcoming adjustment shock is expected to impact 132 countries in 2016 in terms of GDP and hover around this level until 2020. One of the key findings is that the developing world will be the most severely affected. Overall, 81 developing countries, on average, are projected to cut public spending during the forthcoming shock versus 45 high-income countries. Comparing the forthcoming 2016-20 and pre-crisis 2005-07 periods further suggests that 30 per cent of countries are undergoing excessive contraction, defined as cutting expenditure below pre-crisis levels in terms of GDP. Overall, austerity is expected to impact more than two-thirds of all countries during 2016-20, affecting more than six billion persons or nearly 80 per cent of the global population by 2020.

In terms of austerity measures, a desk review of recent IMF country reports indicates that governments are weighing various adjustment measures. These include: (i) elimination or reduction of subsidies, including on fuel, agriculture and food products (in 132 countries); (ii) wage bill cuts/caps, including the salaries of education, health and other public sector workers (in 130 countries); (iii) rationalizing and further targeting of safety nets (in 107 countries); (iv) pension reforms (in 105 countries); (v) labour market reforms (in 89 countries); and (vi) healthcare reforms (in 56 countries). Many governments are also considering revenue-side measures that can adversely impact vulnerable populations, mainly through introducing or broadening consumption taxes, such as value added taxes (VATs) (in 138 countries), as well as privatizing state assets and services (in 55 countries). Contrary to public perception, austerity measures are not limited to Europe; in fact, many of the principal adjustment measures feature most prominently in developing countries.

Projections with the United Nations Global Policy Model indicate that the expected spending cuts will negatively affect GDP and employment in all regions. Compared to a baseline scenario without spending contraction, global GDP will be 5.5 per cent lower by 2020 further resulting in a net loss of 12 million jobs. Upper-middle and low income countries will be hardest hit, with fiscal adjustment reducing GDP by roughly 7.5 and 6 per cent, respectively, over the 2016-20 period. East Asia and Sub-Saharan Africa will be the most affected regions.

It does not need to be a decade of adjustment. Most developing countries did not pursue this policy stance in 2012-14 in order to attend to the pressing demands of their populations at a time of slow growth. Moreover, policy makers have a variety of options to expand fiscal space at their disposal, which should be examined in open, national dialogue. And some governments are actually increasing subsidies and the wage bill, and expanding coverage/benefits of social protection and health, despite their contractionary fiscal environments.

This paper questions if the projected fiscal contraction trajectory—in terms of timing, scope and magnitude—as well as the specific austerity measures being considered are conducive to socio-economic recovery and the achievement of the Sustainable Development Goals (SDGs). This paper encourages policy makers to recognize the high human and developmental costs of poorly-designed adjustment strategies and to consider alternative policies that support a recovery for all.