FYI – IMF working paper “The Distributional Effects of Fiscal
Consolidation” by Ball, Furceri, Leigh, and Loungani (June 2013). The paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, the paper finds that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that
spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments.
The policy implications of the paper are disappointing but in any case the paper shows divergence from orthodoxy. We have seen recently other IMF research pieces acknowledging the adverse effects of austerity (by the same authors in 2011 see “Painful Medicine”). Further, IMF Chief Economist Olivier Blanchard recently admitted serious underestimation of multipliers with respect to the depth of the economic contraction in the design of austerity policies (Blanchard and Leigh 2013: “Growth Forecast Errors and Fiscal Multipliers.”). However, these IMF research papers do not appear to be reflected in IMF operations.
In 2013, the scope of public expenditure consolidation is expected to intensify significantly, impacting 119 countries in terms of GDP, and then steadily increase to reach 132 countries in 2015. One of the key findings of ourpaper “The Age of Austerity: A Review of Public Expenditures and Adjustment Measures in 181 Countries”, based on IMF data and a review of 314 IMF country reports, is precisely that fiscal contraction is most severe in the developing world. 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.
The United Nations has repeatedly warned that austerity is likely to bring the global economy into further recession and increase inequality. In doing so, it has called on governments for forceful and concerted policy action
at the global level to make fiscal policy more countercyclical, more equitable and supportive of job creation; to tackle financial market instability and accelerate regulatory reforms; and to support development goals. A Recovery for All requires shedding the myopic scope of macroeconomic and fiscal policy decisions and, instead, basing them on their potential to achieve full employment, human development, people’s rights and sustainable growth.
Director Global Social Justice Program
Initiative for Policy Dialogue, Columbia University, New York