Spending cuts don’t cure the economy but sicken the people

Demonstration in Rome against
cuts in social spending.
(Photo: Alessandra Raimondi
/Flickr/Creative Commons)

As governments all over the world, from industrialized and developing countries alike, have cut their expenditures in the last two years and prepare further savings for the next, the first casualties are the welfare programs, as contributions from grassroots organizations included in the Social Watch Report 2012 make apparent. But austerity measures have proven useless to overcome the crisis, and could even plunge the world into a recession, according to a growing number of experts and international agencies.

“Austerity fiscal policies that cut on social spending started to be implemented in debt-affected countries and are now spreading even to countries that do not suffer from debt problems or fiscal deficit,” wrote the coordinator of Social Watch, Roberto Bissio, in the overview of the report.

“In order to maintain the financial sector’s prerogatives, states have absorbed most of the costs by making huge loans to the banks,” wrote the author of the French contribution, Grégoire Niaudet, of Secours Catholique. “The other side of the coin is that governments in many countries are now implementing austerity policies, and these weigh heavily on the most vulnerable sectors of society and exacerbate inequality.”

“Despite evidence that counter-cyclical policies acted as effective shock absorbers and enhanced resilience, many governments have sacrificed social expenditures to neo-liberal orthodoxy and a stronger dependence on financial markets,” reads a preliminary statement produced by the Civil Society Reflection Group on Global Development Perspectives, included in the Social Watch Report 2012 under the title “Rio+20 and beyond: No future without justice”.

The “inaction” of those governments “and the mal-action of business as usual are amassing a mountain of social and ecological liabilities,” such as “the erosion of public finance” that prevent them to “support of people’s welfare and care systems”, as well as “high unemployment […], increasing food prices and widespread unfairness”. Those hurdles have provoked “social and political tension and unrest […] from Cairo to Manhattan to New Delhi,” remarked the Reflection Group.

“Although the [European] Commission promotes itself as the staunchest promoter of a social economic approach, there is growing concern that its liberalization tendencies will increase demands on national governments to impose further cuts in public expenditure as part of increasingly stringent monetary discipline,” wrote Mirjam van Reisen, Simon Stocker and Georgina Carr in a chapter of the Social Watch Report 2012 referred to the “indignados” movement.

“The United States can and must move beyond the current shortsighted debate about so-called entitlement spending to embrace the reality that investing in children, communities, eldercare and healthcare are fundamental features of a modern democracy and a strong, resilient economy,” concluded Tanya Dawkins, Aldo Caliari, Julia Wartenberg, Karen Hansen-Kuhn and Alexandra Spieldoch, authors of this national chapter of the report.


Facts are right, theory is  not

Social Watch member organizations’ findings are consistent with studies and assessments released by UN agencies and economists. Mainstream theories have come more and more under challenge, but governments are keeping them alive.

Out of 128 developing countries surveyed by United Nations Children’s Fund (UNICEF), more than 90 had introduced austerity measures that affected their social sectors in 2011 or were planning to do so in 2012, Bissio recalled in the overview of the Social Watch Report. And the contraction was “excessive” in at least one quarter of those nations, meaning expenditures were cut below the pre-crisis level, according to the study published by the Fund’s Division of Policy and Practice.

The United States contributors to the Social Watch Report 2012 quoted a paper issued by another UN agency, the International Labour Organization (ILO), which notes that ensuring basic social protections can be a powerful tool for ensuring sustainable growth, addressing poverty and mitigating the impact of the crisis.

The governments’ predisposition to cut their expenditures that prevails from Canada to the Czech Republic, from Italy to Venezuela, from Spain to Philippines, is “unlikely to produce the intended outcomes and could propel the world into a renewed bout of recession, or even into an outright depression,” alerted Heiner Flassbeck, director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD).

In a policy brief published this month by this UN agency, Flassbeck referred to “scores of cases where fiscal tightening did not trigger the sought-after macroeconomic expansion but, rather, had the opposite effect,” including “a long list of developing countries” that suffered “damaging experiences in the last three decades”.

The expert mentioned “a detailed examination” carried out by the Independent Evaluation Office of the International Monetary Fund (IMF) on fiscal adjustment plans supported by the IMF itself in 70 countries since the early 1980s. Those programs were based on “overoptimistic assumptions” about the “economic recovery” and “the revival of private investment”, and leaded “inevitably to fiscal underperformance,” he noted.

New academic and statistical studies produced by research institutions, international agencies and civil society organizations, some of them purely economic as well as others focused on social indicators (as the Basic Capabilities Index designed by Social Watch), confirmed to a growing number of scholars the idea that "there is a revolving door between the market and government where power and wealth are closely connected,” as James Boyce, professor at the University of Massachusetts, Amherst, has pointed out.

Boyce is one of the founders of Econ4, a group of US economists aimed to use their science “for people, for the planet [and] for the future” and to challenge “the closed-minded dogmas of the past” and the “intellectual monoculture in the economics profession,” reads its mission statement.

This initiative launched a statement in support of Occupy Wall Street that has got in only one month the signatures of some 400 economists all over the world, almost all of them university teachers.


Europe out of work

In their thematic chapter included the Social Watch Report 2012, Mirjam van Reisen, Simon Stocker and Georgina Carr deplored “the policies of austerity” that lead European governments to “cut public expenditure and social benefits, lay off public sector workers and squeeze incomes,” a trend confirmed by the national contributions from that region.

For instance, the Czech government “succeeded in making debt restriction the main topic and is focusing mainly on cuts in social spending”, that included parental allowances, disability benefits, early care and help to families with handicapped children. It also ordered wage cuts and layoffs in the public sector, which represents a large number of women, according to Social Watch member organizations.

The Italian Social Watch Coalition reported that the most affected sectors in that country were welfare, social policies, education, research, official development assistance and transfers to local authorities. The budget approved in 2011 froze public employees’ wages, affecting particularly the school system, which lose more than 100.000 jobs since 2009. The 10 social funds’ budget plummeted from USD 3.6 billion in 2008 to USD 507 million in 2010.

In Spain, the government reduced the public spending by 6%, according to the civil society coalition Plataforma 2015 y Más. The adjustment included the closure of Ministry of Equality, in charge of gender policies. In 2010 and 2011 the international cooperation funds have been reduced by around 20%.


North America: New measures on the way

In the United States, as states and communities reel from the recent federal funding cuts to vital programs, a so-called Congressional “Super Committee” has been tasked with the design of legislation on additional cuts in discretionary funding and direct spending by USD 1.5 trillion through 2021.

The Canadian Centre for Policy Alternatives projected a USD 3.8 billion decline in federal spending in 2011-2012. Most social assistance incomes in the country remain well below the low income cut-off rate. The overall poverty rate is 9%, but affects disproportionately women, Aboriginal peoples, and people with disabilities. Welfare incomes are so low that the Chair of the National Council of Welfare recently called them “shameful and morally unsustainable in a rich country.”


Asia waits for independence

The Republic of Korea must get round two major obstacles to sustainable development: a high dependence on an economic model based on exports and a weak social welfare infrastructure, according to the report produced by the Citizens’ Coalition for Economic Justice. The focal point of Social Watch in that Asian country considers that the government must reduce foreign dependence to foster small and medium-sized businesses through tax exemptions and financial benefits. Public services must be expanded to create jobs and improve the quality of life in Korea.

With respect to Philippines, mounting debts and debt service are the bane of the national development. The country’s outstanding debt ballooned from USD 16.2 million in 1990 to USD 101.5 billion in 2009, reported the Philippine Rural Reconstruction Movement and Social Watch Philippines. The debt-to-GDP ratio was 57.7% at the end of 2009. About a third of the national budget goes to paying the interest and principal of the country’s mounting debt stock. That is a third of the pie sliced off from poverty reduction activities.

Keeping debt at sustainable levels and controlling the repayment haemorrhage are central to take the path to for development. The government borrows a lot to fund its MDG commitments. Its major anti-poverty programmes, such as conditional cash transfer, run on borrowed money and further strain the country’s fiscal situation.


Venezuela’s social investment plummeted

The Programa Venezolano de Educación-Acción en Derechos Humanos (Provea) warned that the economy of that Latin American country contracted for 18 consecutive months. This resulted in spending cuts for social policies, except for the education sector. As a result the “misiones” (social programs) stagnated and the social conflicts worsened.

Provea and another Venezuelan human rights organization, Espacio Público, counted at least 3,114 protests in 2010, continuing a steady rise in the number of demonstrations. The government should review and revitalize the social program Che Guevara Mission designed ago to reduce unemployment to 5%. The budget of this initiative was cut from USD 59 million six years ago to USD 7 million in 2011.

More information
Fiscal tightening, a suicidal policy: http://bit.ly/qEJxxe

This report is based on data from the following sources:
Social Watch Report 2012: http://bit.ly/skL4l4
Econ4: http://bit.ly/rboPRj
On the brink: fiscal austerity threatens a global recession: http://bit.ly/uOeyXU