Three leading IMF economists (Jonathan Ostry, Prakash Lougani, Davide Furceri ,2016) offer the following refreshing thoughts on fiscal austerity as part of a general critique of neoliberalism:
Austerity policies … generate substantial welfare costs …and worsen employment and unemployment. The notion that fiscal consolidations can be expansionary (that is, raise output and employment), in part by raising private sector confidence and investment, has been championed by, among others, Harvard economist Alberto Alesina in the academic world and by former European Central Bank President Jean-Claude Trichet in the policy arena. However, in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality … In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed….In the case of fiscal consolidation, the short-run costs in terms of lower output and welfare and higher unemployment have been underplayed, and the desirability for countries with ample fiscal space of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated.
So far, so sound. But…what has the IMF proffered in practice through its bilateral surveillance advisory services that are typically channelled via the Article IV consultations? Brad Setser from the Council on Foreign Relations thinks that there is a disconnect between what the Fund preaches – or least some of its more progressive voices do – and what it practices in operational terms. He notes:
…the Fund is advocating a 2017 fiscal consolidation for the euro zone, as the consolidation the Fund advocates in France, Italy, and Spain would overwhelm the modest fiscal expansion the Fund proposed in the Netherlands (The IMF is recommending that Germany stay on the fiscal sidelines in 2017).
The same seems to be true in East Asia’s main surplus economies (China, Japan, Korea)…
A 2016 ILO study – which I happened to supervise – found that in more than 90 out of 100 low and middle-income economies, the IMF Article IV consultations recommended fiscal consolidation.