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The Insanity of Austerity

Although austerity measures do not command the same attention that they did in the aftermath of the 2008 financial crisis, they are still central to the prevailing policy playbook. Worse, the longer that governments cling to this failed policy approach, the harder it will be to achieve sustainable, inclusive economic growth.

WASHINGTON, DC – As finance ministers gather in Washington, DC, for the International Monetary Fund and World Bank Annual Meetings, most of the world’s population is bearing the burden of government budget cuts. For many of these individuals and households, living standards have deteriorated markedly over the past decade, and will continue to do so until economic policies are changed.

If world leaders want inclusive, jobs-rich economic growth and sustainable development, they must reverse a policy trend that began in 2010. Following the 2008 global financial crisis, governments in both high-income and developing countries suddenly abandoned fiscal stimulus and began slashing public expenditures in the name of balanced budgets and debt reduction. And as we show in a new report, further austerity-minded adjustments will continue at least until 2024. With belt tightening having become the “new normal,” investment in the sources of future growth will remain at a level far below what it otherwise could have been, and inequalities and social discontent will likely increase.

Based on IMF projections, we predict that another fiscal-adjustment shock will take hold next year. By 2021, total government expenditures as a share of GDP will be declining across 130 countries, nearly three-quarters of which are in the developing world. Moreover, 69 countries will be undergoing excessive contraction, entailing cuts in expenditure (as a share of GDP) to far below pre-crisis levels. Among those with the direst development and humanitarian needs are Angola, Burundi, Congo, Djibouti, Egypt, Eritrea, Ethiopia, Iraq, Jamaica, Jordan, Nigeria, and Yemen.