Sat | Jan 20, 2018

Nobody wants needless austerity – IMF

Published:Wednesday | June 22, 2016 | 12:00 AMMcPherse Thompson
IMF Managing Director Christine Lagarde

The International Monetary Fund (IMF) favours fiscal policies that support growth and equality over the long term, and this should not be misconstrued as being for or against economic austerity measures.

"Governments simply have to live within their means on a long-term basis or face some form of debt default, which normally is quite costly for citizens, and especially the poorest. This is a fact, not an ideological position," according to IMF chief economist, Maury Obstfeld, who took up the position just over eight months ago.

In an interview for the June 2016 issue of the IMF's quarterly magazine, Finance & Development, Obstfeld was asked whether he agreed with some who argued that an article, in the same publication, 'Neoliberalism: Oversold?', signifies a major change in the Fund's thinking.

For example, he was asked, is the IMF now saying that austerity does not work, and, indeed that it exacerbates inequality? Obstfeld suggested that the article has been widely misinterpreted, noting that it does not signify a major change in the Fund's approach.

"I think it is misleading to frame the question as the Fund being for or against austerity," he said, referring to a set of economic policies implemented with the aim of reducing government budget deficits. Austerity measures may include spending cuts, tax increases, or a mixture of both, and may be undertaken to demonstrate the government's fiscal discipline to creditors and credit-rating agencies by bringing revenues closer to expenditures.

"Nobody wants needless austerity. We are in favour of fiscal policies that support growth and equity over the long term. What those policies will be can differ from country to country and from situation to situation," the chief economist said.

It was in that regard that Obstfeld said that governments simply have to live within their means on a long-term basis, or face some form of debt default.

"Our job is to advise how governments can best manage their fiscal policies so as to avoid bad outcomes," he said.

"Sometimes, this requires us to recognise situations in which excessive budget cutting can be counterproductive to growth, equity, and even fiscal sustainability goals," Obstfeld added.

Asked how does that rethinking translates at the operational level, Obstfeld said countries need credible medium-term fiscal frameworks that leave markets confident that the public debt can be repaid without very high inflation.

"Countries with such frameworks will typically have room to soften economic slumps through fiscal means, including automatic stabilisers," he said.

Automatic stabilisers have been described as economic policies and programmes designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers.

The best-known automatic stabilisers are corporate and personal taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilisers are so called because they act to stabilise economic cycles and are automatically triggered without explicit government intervention.

Obstfeld said that unfortunately, some countries let public debt rise to such high levels that they risk losing market access and have no choice but to tighten their belts even when their economies are doing badly.

"Our research indicates that in such cases, the poor often suffer disproportionately, and so it is important always to consider the most vulnerable when planning fiscal adjustment," he said.

"Of course, there are limits to the pain economies can or should sustain, so in especially difficult cases, we recommend debt reprofiling or debt reduction, which require creditors to bear part of the cost of adjustment. That is the approach we are currently recommending for Greece," Obstfeld said.

In the article 'Neliberalism: Oversold?', the researchers argued that fiscal consolidation, a neo-liberal policy being pursued under Jamaica's four-year economic support programme with the IMF, has on average been followed by drops in growth rather than expansion.

They suggested that instead of delivering growth, some neo-liberal policies have increased inequality, and in turn, has jeopardised long-lasting economic expansion.