News
BackIn its latest prognosis concerning the world economy, the World Economic Outlook (WEO), the International Monetary Fund notes that the short-term multiplier effect of public spending has been significantly underestimated. The so-called fiscal multipliers measure effects, which have certain public financial impulses on output. For example the lack of public investments in social services entails a variety of consequences: fewer employees are required and the treasury coffers receive less income and turnover tax.
Trade Unions have always been against “strangling the economy in the name of saving”
So far, IMF, OECD and the European Commission believed that austerity measures would only have a slight impact on economic growth and only drastic cuts would reduce budget deficits and national debt. Hence, we have been told for years, the way out of national debt would be to reduce spending and to curb social expenditure and public investments to reduce financial deficits. Even though the fact that budget consolidations without targeted investments have a negative impact was not disputed, it was nevertheless regarded as a minor inconvenience. The European Trade Unions were opposed to the EU dictate of austerity policy right from the start and demanded more investments in growth and employment as a way out of the crisis, most recently in the European Social Pact.
Given the fact that now, in spite of drastic cuts in the crisis countries and general restructurings in the Eurozone the great target of debt reduction became even more remote, the IMF quite obviously began a rethinking process. The current report deals with the question whether the effects of budget cuts were so negative because one had underestimated the impact, hence the fiscal multiplier.
Misjudgement with real consequences for millions of people
The IMF reviewed the 28 richest countries of the G20 and EU. In doing so, the growth prognoses since 2010 of Commission, OECD, EIU (Economist Intelligence Unit) and IMF itself were analysed with regard to their realisation. During the review period, the four organisations, depending on the calculation model worked on the assumption that budget cuts would have a negative impact of between 0.4 % (OECD calculation) and 1.2 % (IMF calculation) on Gross Domestic Product (GDP). However, the IMF found that the value assumed by the fiscal multiplier had been rated far too low. The negative impact of austerity measures were 0.5 percentage points higher than originally assumed. Hence, the prognoses had to be corrected to 0.9 to 1.7 % of GDP. This means according to the new IMF calculation that even if a country reduces public spending by 1 % of its GDP p.a., GDP itself is reduced by 1.7 %. This is of course associated with a reduction of employment figures and private consumption.
Criticism also voiced by the European Parliament
Renowned representatives of the European Parliament also severely criticised the failed austerity measures. The Austrian MEP Hannes Swoboda (S&D) for example expects an apology of the people in charge of imposing European cutbacks, which include EU Commission President Manuel Barroso, Economic Affairs Commissioner Olli Rehn and the German Chancellor Angela Merkel. This policy was responsible for many people losing their jobs and livelihoods and public service systems being destroyed said the leader of the European Social Democrats in the European Parliament.
Nevertheless, it is to be welcomed that at least the IMF backs down and realises the damage caused by the one-sided austerity policy, even if trade unions and partner organisations have drawn attention to the devastating consequences of this policy for years. One can only hope that the European Commission soon realises that consolidations only promote growth when combined with investments.
Link to World Economic Outlook of the IMF
So far, IMF, OECD and the European Commission believed that austerity measures would only have a slight impact on economic growth and only drastic cuts would reduce budget deficits and national debt. Hence, we have been told for years, the way out of national debt would be to reduce spending and to curb social expenditure and public investments to reduce financial deficits. Even though the fact that budget consolidations without targeted investments have a negative impact was not disputed, it was nevertheless regarded as a minor inconvenience. The European Trade Unions were opposed to the EU dictate of austerity policy right from the start and demanded more investments in growth and employment as a way out of the crisis, most recently in the European Social Pact.
Given the fact that now, in spite of drastic cuts in the crisis countries and general restructurings in the Eurozone the great target of debt reduction became even more remote, the IMF quite obviously began a rethinking process. The current report deals with the question whether the effects of budget cuts were so negative because one had underestimated the impact, hence the fiscal multiplier.
Misjudgement with real consequences for millions of people
The IMF reviewed the 28 richest countries of the G20 and EU. In doing so, the growth prognoses since 2010 of Commission, OECD, EIU (Economist Intelligence Unit) and IMF itself were analysed with regard to their realisation. During the review period, the four organisations, depending on the calculation model worked on the assumption that budget cuts would have a negative impact of between 0.4 % (OECD calculation) and 1.2 % (IMF calculation) on Gross Domestic Product (GDP). However, the IMF found that the value assumed by the fiscal multiplier had been rated far too low. The negative impact of austerity measures were 0.5 percentage points higher than originally assumed. Hence, the prognoses had to be corrected to 0.9 to 1.7 % of GDP. This means according to the new IMF calculation that even if a country reduces public spending by 1 % of its GDP p.a., GDP itself is reduced by 1.7 %. This is of course associated with a reduction of employment figures and private consumption.
Criticism also voiced by the European Parliament
Renowned representatives of the European Parliament also severely criticised the failed austerity measures. The Austrian MEP Hannes Swoboda (S&D) for example expects an apology of the people in charge of imposing European cutbacks, which include EU Commission President Manuel Barroso, Economic Affairs Commissioner Olli Rehn and the German Chancellor Angela Merkel. This policy was responsible for many people losing their jobs and livelihoods and public service systems being destroyed said the leader of the European Social Democrats in the European Parliament.
Nevertheless, it is to be welcomed that at least the IMF backs down and realises the damage caused by the one-sided austerity policy, even if trade unions and partner organisations have drawn attention to the devastating consequences of this policy for years. One can only hope that the European Commission soon realises that consolidations only promote growth when combined with investments.
Link to World Economic Outlook of the IMF