Why austerity measures dont work

Kimberly Amadeo is an expert on U. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. He has worked more than 13 years in both public and private accounting jobs and more than four years licensed as an insurance producer.

His background in tax accounting has served as a solid base supporting his current book of business. Austerity measures are reductions in government spending , increases in tax revenues, or both. These harsh steps are taken to lower budget deficits and avoid a debt crisis.

Governments are unlikely to use austerity measures unless forced to do so by the bondholders or other lenders. These measures act like contractionary fiscal policy. They slow economic growth. That makes it even more difficult to raise the revenue needed to pay off sovereign debt. Austerity measures require changes in government programs. For example, they:.

Austerity measures also include tax reforms. Other austerity measures reduce regulations to lower business costs. They require governments to:. Austerity measures may not include all of these changes. It depends on the country's situation.

Countries use austerity measures to avoid a sovereign debt crisis. That's when creditors become concerned that the country will default on its debt. That's the tipping point, according to a study by the World Bank. Every percentage point of debt above this level costs the country 1. Creditors then start demanding higher interest rates to compensate them for the higher risk. Higher interest rates mean it costs the country more to refinance its debt.

At some point, it realizes it can't afford to keep rolling over debt. It then turns to other countries or the International Monetary Fund for new loans. In return for bailouts, these new lenders require austerity measures. They just don't want to bankroll continued spending and unsustainable debt. Austerity measures restore confidence in the borrowing country's budget management.

The proposed reforms create more efficiency and support a stronger private sector. For example, targeting tax evaders brings in more revenue while supporting those who do pay their taxes. Privatizing state-owned industries brings in foreign expertise.

It also encourages risk-taking and expands the industry itself. Instituting a VAT or value-added tax reduces exports by making them more expensive. This protects local industries, allowing them to grow and contribute to the economy. Greece - In , the European Union imposed austerity measures during the Greek debt crisis. Greece's austerity measures targeted tax reform. Lenders required Greece to reorganize its revenue collection agency to crack down on evaders. The agency targeted 1, high-wealth and self-employed individuals for audits.

It also reduced the number of offices and set performance targets for managers. Other specific measures required Greece to:. The Greek government agreed to privatize 35 billion euros in state-owned assets by It also promised to sell an additional 50 billion euros in assets by According to this line of inquiry, stronger wage equality, labor protections and collective bargaining power can stimulate purchasing power and demand, and actually help prevent future financial crises, suggesting precisely the opposite of this erroneous myth.

As a result, rising income and wage inequality reduces aggregate demand quite severely and thus constrains economic dynamism and inclusive growth significantly, according to experts.

The case for a smaller public sector, in the meantime, is by no means self-evident. Many of the countries which have weathered the storm of the economic crisis, and consistently rank at the top of human development indicators—places like Sweden, Denmark, France, and increasingly Brazil—have some of the largest public sectors.

As human rights enshrined in international law, governments have duties to respect, protect and fulfill the rights to a decent wage, clean and healthy working conditions, to associate and strike, as well as other fundamental social rights which form the foundation of the modern social welfare system, independent of their effects on economic competitiveness in a global economy.

As the UN Committee on Economic, Social and Cultural Rights—the main body to interpret what economic and social rights norms and principles mean in changing times—made explicitly clear this year, any austerity measures or other crisis-response policies which do not respect the following human rights criteria can be determined, in essence, unlawful.

First, any policy that may impede the progressive realization of economic, social and cultural rights must be temporary and limited to the period of crisis. Second, the policy must be necessary and proportionate, in that not adopting it would put human rights at even greater risk. Third, the policy must not be discriminatory in effect and must comprise all possible measures, including tax measures, to support the social transfers needed to mitigate inequalities that can grow in times of crisis and ensure the protection of most vulnerable groups.

And lastly, the policy must identify and protect the minimum core content of the rights enshrined in the International Covenant on Economic Social and Cultural Rights at all times. Hasty, imprudent attacks on core economic and social rights protections like decent wages, collective bargaining, and social protection in a time of economic crisis may very well adversely affect low- and middle-income households for a long period ahead.

As such, and especially considering the existence of financing alternatives to austerity, they are likely unlawful under the Covenant. They also represent sloppy, ideologically-driven and plain bad economics. The continuing economic crisis seems also to have prompted a crisis in innovative policy ideas and alternative financing arrangements.

Governments promoting austerity policies consistently fall back on the argument that the economic crisis—no matter the causes—has tied their pocket books, with no other solutions except backsliding in public expenditures on economic and social rights programs.

For many countries, perhaps the biggest fiscal fallacy is that there is any fiscal crisis at all. Austerity is neither necessary nor is it inevitable. Resources abound in many countries, if governments would only take steps to properly generate and channel them into protecting and fulfilling their human rights duties, as is their duty under international law. Alternatives to austerity are in fact numerous. Each country is unique, with potential risks and trade-offs at every step, but generally speaking governments have five sets of tools to mobilize and use resources effectively—together referred to as the Maximum Available Resources MAR Star: 1 Re-allocation of government expenditure to more rights-realizing programs; 2 Increasing government revenue, especially through tax policy in equitably ways; 3 Improving monetary policy and financial regulation to protect rights; 4 Deficit financing or restructuring existing debt, and finally, for some countries, 5 Raising funds through international cooperation.

Taxation is a key vehicle for redressing social inequalities, and goes to the heart of the accountability bond between a State and its people.

Progressive, non-discriminatory tax policies carried out by capable and accountable tax authorities can generate substantial sums to offset public budget deficits and compensate for the social costs of the crisis, especially in countries with very low tax bases, such as Ireland and Guatemala.

New sources of financing are also quite feasible, such as financial transaction taxes FTT or the Robin Hood Tax , which have been proposed as a way of promoting greater financial sector accountability, mitigating some of the worst forms of speculation, while simultaneously recuperating some of the public costs incurred as a result of the global financial and economic crises.

Illegal tax evasion by companies and rich households meanwhile causes an endemic drain on the availability of revenues for the progressive realization of rights, especially in countries with already high levels of poverty, inequality and already low tax bases. While high-income countries are among the biggest losers in absolute terms, low- and middle-income countries are particularly vulnerable to tax evasion.

Official studies put the amount lost to illegal capital flight in developing countries at between per cent of GDP. In Europe, meanwhile, financial modeling shows that had the UK government taken decisive steps to end illegal tax evasion between and , there would simply be no debt in this highly-indebted country. Facilitating rights-fulfilling financing and directed credit toward strategic, decent-job generating sectors could also make economic growth more inclusive and employment-intensive.

For countries with high levels of sovereign debt especially debt accrued illegitimately , meanwhile, debt restructuring presents real possibilities to prioritize obligations to the wellbeing of their people over commitments to their creditors. Debt relief and restructuring efforts in the past have been widely successful. The heavily indebted poor countries HIPC debt relief efforts helped to cut debt repayments from 20 per cent of government revenue in to less than 5 per cent in , according to studies.

This has for the most part allowed governments to re-invest in essential social and economic programs. Primary school enrolment jumped to 82 per cent from less than 50 per cent in the late s in Tanzania , for example, after school fees were abolished as a result of the country being granted debt relief in In an unprecedented step, Norway became the first creditor nation to assume co-responsibility for the adverse human impacts of its own development loans in The human rights impacts of debt servicing and other financial obligations have been of consistent concern to human rights treaty bodies.

UNCTAD has long called for a more balanced approach to sovereign debt restructuring , including a fairer burden of adjustment between borrowers and private sector creditors. It advocates a temporary debt standstill, whether debt is public or private, accompanied by exchange controls, including the suspension of convertibility for foreign currency deposits and other assets held by residents as well as non-residents.

More controversially, UNCTAD says the IMF should not be involved in the negotiations between sovereign debtors and private creditors since countries affected are among the shareholders of the fund, which is also a creditor.

More fundamentally, civil society groups are calling for a rethink of current debt sustainability criteria that would not be based on debt-to-export ratios, but on sustainable development criteria and human rights norms and principles. International human rights law, as specified in the ICESCR and the International Covenant on the Rights of the Child, compel governments to use the maximum of available resources to realizing economic and social rights.

Availability does not only refer to resources under the command of the government, but those that could be available through international cooperation or improved management and generation of resources.

In this sense, governments, in complying with their international commitments, are responsible for exploring alternatives and where possible broadening their fiscal space by mobilizing the maximum amount of resources possible in equitable, participatory, transparent, accountable rights-realizing ways.

This myth suggests that regardless of our disagreements with the way economic policy processes are being conducted in our names, we have little choice. Public participation and accountability are nice ideals, but the abruptness of needed reforms simply outpaces the possibility of providing the information and transparency needed.

The rhetoric, language and letter of the law of human rights are nice platitudes, but offer no meaningful tools or avenues to dispute economic decisions, and cultivate actionable alternatives.

By shifting the burden to governments to prove its policies are designed and implemented in rights-realizing ways, human rights norms, principles and mechanisms—beyond being a manifestation of international law—offer potent empowering tools to turn the tide towards more just, resilient, inclusive and sustainable economic policy alternatives to austerity.

Unjustified, unnecessary, disproportionate and discriminatory cuts in public programs designed to fulfill the human rights to education, social protection, health, food, water, or housing—measures which disproportionately affect those who had no hand in causing the economic crisis—are not only immoral and economically counterproductive: For most governments, they are expressly unlawful , as the UN Committee on Economic, Social and Cultural Rights explained in an unprecedented letter to State parties to their Covenant in the context of deepening economic crisis in the spring of In other words, governments in crisis must justify that any cuts which affect rights are reasonable in reference to existing alternative resources which could be raised through for example tax policy reforms to recompense the losses in the public budget.

In the rare cases where there are no alternatives, budgeting must be undertaken with the utmost care with respect to ESC rights, and must not lead to discrimination in law or in practice. Budgeting during an economic downturn must not undercut minimum essential levels of basic needs in society, and must embed the principles of transparency, public participation, accountability and remedy for harm done. Human rights and social justice advocates have begun to strike back—in the street, in the courtroom and at the United Nations—to exact accountability for the profound casualties of the crisis.

Advocates are increasingly coordinating these actions within an International Citizen Debt Audit Network to challenge basic assumptions about the legitimacy of debt in times of crisis. Human rights advocates are also challenging fiscal austerity measures on constitutional and other legal human rights grounds in the courts. Pensioners in Latvia for example challenged the constitutionality of a government reform restricting pension payments, and the Constitutional Court deemed the act unconstitutional citing the fundamental right to social security.

The Court asserted that the State had the obligation to guarantee the minimum essential levels of the right irrespective of resources, and pointed to the fact that the government had not considered other less restrictive measures nor designed an effective remedy for reduced pensions. The Court refused to consider the conditions set out by international creditors as worthy of trumping Constitutional guarantees of the right to social security.

The Constitutional Court of Romania , meanwhile, forced the government to design alternatives to reducing the debt which would not affect fundamental rights. The Hungarian Constitutional Court meanwhile has been particularly active in challenging several government tax policies post-crisis, so much so that the government set out to amend the constitution to strip the court of its power to annul tax-related laws for all instances in which certain constitutional human rights were at stake.

In the US, courts in New Jersey and California have received challenges to crisis-induced education and disability cuts respectively. In a remarkable recent case, concerned British students brought a case against the government arguing that a policy tripling university tuition fees would effectively thwart equal university access for ethnic minorities, the poor and other marginalized groups, and was thus in breach of the right to education and non-discrimination set out in both the UK Human Rights Act and the European Convention of Human Rights.

Advocates in the UK meanwhile continue to insist that human rights provides a coherent, galvanizing alternative to the government cutbacks.

Civil society has also spearheaded several litigation initiatives against credit-rating agencies. Advocates in Illinois, Ohio, Connecticut and California , for example, have accused different credit-rating agencies for acting fraudulently in providing factual evidence about investment ratings they knew to be false.

Social justice advocates have even leveraged the United Nations human rights protection mechanisms to challenge austerity measures and insist on more people-centered economic recovery policies. The human rights dimensions of austerity measures in the US , Ireland, Greece and Spain have all been brought before independentUN bodies—compelling these governments to justify their conduct and openly answer before the international community.

While it is true that these bodies can only offer non-binding recommendations and have no enforcement power strictly speaking, their observations have provided much-needed exposure, legitimacy and renewed strength to advocacy efforts back home. Wherever you are, your human rights are increasingly being sacrificed at the altar of financial stability.

When individuals, households, communities, and whole nations must surrender their hard-won rights to education, adequate health care, and decent jobs in free and healthy conditions, to balance budget sheets, the basic values of human dignity are turned on their head.

Or fight back for human dignity in defiance of unneeded, disproportionate and unjustified cutbacks. Skip to main content. Search form. Fiscal Fallacies: 8 Myths about the 'Age of Austerity' This briefing can be downloaded in pdf format here Four years into the global economic crisis, political and economic malaise continues to besiege the eurozone and the US, the rising Eastern powers are stumbling, economic growth across the Southern hemisphere sputters, and worries of a repeat global economic recession—if not full blown depression—continue to unsettle people the world over.

Myth 1: Governments caused the crisis through runaway public spending. Did you know? Human rights responses A human rights-centered alternative to austerity-driven recession would move beyond simply treating the symptoms of the enduring financial and economic crisis to address some of the structural causes—chief among them, financial de-regulation and income inequality.

Myth 2: Deep cutbacks, especially to expensive social entitlement programs, are the only way to fix the deficit, calm the markets and thereby revitalize the economy Starting in , governments across the world sharply cutback in public spending fearing that climbing deficits would startle bond markets.

Myth 3: But deficits are problematic. A comparison with what has happened on this side of the Atlantic is illuminating. For the purposes of the natural experiment, the U. In adopting a fiscal stimulus of gradually declining magnitude over the past four years, the Obama Administration has administered what was, until recently, the standard medicine for a sick economy.

As one would have expected on the basis of the textbooks, the American economy, while hardly racing ahead, has fared considerably better than its British counterpart.

Between and , G. For the U. What may be more surprising—at least to those of you who have been listening to the deficit hawks—is that the United States, while sticking with Keynesian stimulus policies, has also managed to bring down the size of its deficit, relative to G.

Back in , at the depths of the recession, both countries had double-digit deficits. Today, the U. But with the U. Next year, according to the latest forecasts from the Congressional Budget Office and the O. Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover and Paul Ryan.

John Cassidy has been a staff writer at The New Yorker since He also writes a column about politics, economics, and more for newyorker. Enter your e-mail address.