International Finance
Economy

IMF: Austerity measures not always good

IFM Correspondent Says benefits in terms of increased growth difficult to establish June 20, 2016: The International Monetary Fund (IMF), in its latest report, has put out a strong message against austerity measures undertaken by governments. The report, a critic to neo-liberal doctrine, states that austerity measures do more harm than good in the long run. By definition, neoliberalism is a policy model of social...

IFM Correspondent

Says benefits in terms of increased growth difficult to establish

June 20, 2016: The International Monetary Fund (IMF), in its latest report, has put out a strong message against austerity measures undertaken by governments. The report, a critic to neo-liberal doctrine, states that austerity measures do more harm than good in the long run.

By definition, neoliberalism is a policy model of social studies and economics that transfers control of economic factors to the private sector from the public sector. It takes from the basic principles of neoclassical economics, suggesting that governments must limit subsidies, make reforms to tax law in order to expand the tax base, reduce deficit spending, limit protectionism, and open markets up to trade.

The article authored by Jonathan D Ostry, Prakash Loungani and Davide Furceri, all in the IMF’s research department, states that austerity measures are aimed at cutting government spends rather than increasing tax for the rich leading to more inequality.

“The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries,” the authors said. However, “the costs in terms of increased inequality are prominent”.

“Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.­”

The IMF team, however, praised some aspects of the liberalising agenda such as the expansion of trade and the increase in foreign direct investment.

George Osborne, the UK chancellor, announced big austerity plans when he took over the Treasury in May 2010, to tackle Britain’s budget deficit and rising national debt. IMF, however, challenged Osborne’s views that such measures are needed to give the government more flexibility in case a need arises.

“It turns out, however, that the cost could be large – much larger than the benefit. The reason is that, to get to a lower debt level, taxes that distort economic behaviour need to be raised temporarily or productive spending needs to be cut – or both. The costs of the tax increases or expenditure cuts required to bring down the debt may be much larger than the reduced crisis risk engendered by the lower debt.”

Dr Satyendra S Nayak agrees with views of the IMF. “Recent experience of austerity measures in Europe to deal with the crisis indicates that these measures in heavy dose have done more harm than good. It has increased inequality by leaving bottom level population worse off than before,” he says. Nayak added that austerity measures, therefore, need to be targeted towards upper and richer sections of society who have to bear more the cost of fighting recession, unemployment and pave way for sustainable economic recovery.

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