Austerity Measures in Developing Countries: Public Expenditure Trends and the Risks to Women and Children

ABSTRACT

This study examines how austerity measures may have adversely affected children and women in a sample of 128 developing countries in 2012. It relies on International Monetary Fund (IMF) fiscal projections and IMF country reports to gauge how social assistance and other public spending decisions have evolved since the start of the global economic crisis. The study finds that most developing countries boosted total expenditures during the first phase of the crisis (2008–09); but beginning in 2010, budget contraction became widespread, with ninety-one governments cutting overall spending in 2012. Moreover, the data suggest that nearly one-quarter of developing countries underwent excessive fiscal contraction, defined as cutting expenditures below pre-crisis levels. Governments considered four main options to achieve fiscal consolidation – wage bill cuts/caps, phasing out subsidies, further targeting social safety nets, and reforming old-age pensions – each of which would be likely to have a disproportionately negative impact on children and women.

CONCLUSIONS

Most developing countries moved swiftly to counter the effects of the global economic crisis by introducing fiscal stimulus packages during 2008–09, which protected or increased assistance to social sectors. In a second phase of the crisis (2010 onward), however, many governments began to cut deficits and reduce overall expenditures. At the time of writing, our analysis confirms that the scope of austerity had widened quickly, with seventy developing countries reducing total expenditures by nearly three percent of GDP, on average, in 2010, and ninety-one developing countries expected to reduce annual expenditures in 2012. Moreover, comparing the 2010–12 and 2005–07 periods suggests that nearly one-quarter of developing countries were undergoing excessive contraction. Even more worrisome, the scope of expenditure consolidation widened considerably among developing countries since a previous analysis was carried out in October 2010 (Ortiz et al. 201029. Ortiz, Isabel, Chai, Jingqing, Cummins, Matthew and Vergara, Gabriel. 2010. “Prioritizing Expenditures for a Recovery for All: A Rapid Review of Public Expenditures in 126 Developing Countries”. UNICEF. Social and Economic Policy Working Paper

Budget cuts pose clear risks to children and women in terms of their impact on the level and quality of essential public assistance. Despite data gaps, aggregate fiscal contraction during 2010–12 likely affected social sector spending allocations and jeopardized the ability of social protection systems to provide adequate support to vulnerable children and women, even in countries with a policy intention of safeguarding so-called priority spending. The adverse effects of the main austerity measures being adopted were also likely to be disproportionately felt by children and women: wage bill reductions can hamper the delivery and quality of essential health, nutrition, and education goods and services, especially in rural areas; subsidy reversals can make food, transport, and other basic goods unaffordable; and rationalizing social protection schemes, including pension benefits, runs a high risk of exclusion at a time when children and women are most in need.

And there are other risks in the current policy environment. While this article has exclusively focused on expenditure-side measures, many governments were also altering consumption taxes on basic goods, such as food items and fuel and energy products, by increasing or expanding value-added tax (VAT) rates or sales taxes. In the absence of exemptions, such revenue-side policies can further erode the already limited incomes of vulnerable households and stifle general economic activity; they can also be regressive, placing a disproportionate burden on poorer households (Ortiz, Chai, and Cummins 2011a26. Ortiz, Isabel, Chai, Jingqing and Cummins, Matthew. 2011a. “Austerity Measures Threaten Children and Poor Households: Recent Evidence in Public Expenditures from 128 Developing Countries”. UNICEF. Social and Economic Policy Working Paper

As a result, tax reforms pose further dangers to children and women.

Protecting vulnerable populations is critical to equitably sharing the adjustment costs and avoiding detrimental or even irreversible effects on children and women. However, macroeconomic and fiscal decisions are often taken without comprehensive assessment of their potential impact on employment, human development, and inclusive and sustainable growth. It is therefore imperative that decision makers carefully review the distributional impact, as well as possible alternative policy options, for economic and social recovery.

To mitigate the risk of social spending being adversely impacted during expenditure contraction in the short term, it is important to focus policies on preserving and expanding pro-poor expenditures within a framework of medium-term fiscal sustainability. It is also imperative that policymakers recognize that spending cuts are not inevitable. In fact, there are a number of alternative options to boost social investments, even in the poorest countries, which include reallocating current expenditures, increasing tax revenue, lobbying for increased aid and transfers, tapping into fiscal savings and foreign exchange reserves, borrowing or restructuring existing debt, and adopting a more accommodating macroeconomic framework (Isabel Ortiz, Jingqing Chai, and Matthew Cummins 2011c28. Ortiz, Isabel, Chai, Jingqing and Cummins, Matthew. 2011c. “Identifying Fiscal Space: Options for Social and Economic Development for Children and Poor Households in 184 Countries”. UNICEF. Social and Economic Policy Working Paper

Not only can these viable options counter the intensifying drive toward austerity, but they can also provide essential support to vulnerable households when they are most in need and ensure that economic recovery is inclusive of all persons, including children and women.

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