Social Spending on Shaky Floors: How the IMF is Covering up Austerity
This year, 85% of the world’s population will live in the grip of stringent austerity. In her Spring Meetings curtain raiser speech, IMF managing director Kristalina Georgieva urged countries to reduce budget deficits to curb inflation. For decades, the world has been undergoing a never-ending loop: crises then austerity, followed by more crises and more austerity. Austerity kills. It stunts lives and it destroys potential. It cripples economies. It drives up inequality and poverty.
Meanwhile, an increasing number of governments are requesting IMF financial support so they can face the multiple crises they are facing. Since 2020, the IMF has provided nearly $300 billion in financing to 96 countries. This support comes with greater power exercised by the Fund over governments in desperate need of the institution’s stamp of approval. Their people face unaffordable prices for food, shelter and energy. They live in fear of the costs of getting sick. What the IMF does now, and how it does or does not help these people, will shape the reputation of the institution for many years to come.
To soften the harms of austerity, and as response to mounting criticism, the IMF has been implementing a practice known as ‘social spending floors’. These are often ‘soft’ lending conditions designed to protect people from the worst consequences of austerity. This has represented an encouraging step forward, but have these floors been effective? We sought to find out by closely analyzing social spending floors in all 17 IMF loan programs agreed with low-and-middle income countries in 2020 and 2021.
We found that, while an improvement, social spending floors are failing to do what they are intended to. At the same time, their existence arguably obscures and postpones the fundamental strategic questioning of the necessity of the IMF’s blueprint of rapid and harmful austerity. Here is why:
They are opaque and inconsistent:
IMF loan review documents do not publish sector-specific or functional spending-disaggregated data that would enable monitoring progress on social policy objectives and comparison between countries. As such, governments can reallocate spending between social sectors, even decreasing expenditures in some areas, while still succeeding to meet floors. For example, Jordan’s social spending floor covering non-wage current spending on health, education, cash assistance, and school meal programs is considered “met” even if in 2020–21 the government cut current spending on higher education, kept school meal programs the same, and increased funding for the national aid fund. Such nuances are lost in the aggregate floor.
They are inadequate:
Social spending floors are not meaningful and ambitious instruments to underpin social development. Instead, they largely encompass haphazardly grouped policies. They rarely increase over the duration of programs, and even decreased as a share of current expenditures in Jordan, Chad, and Kenya. In cases we could verify, they do not even meet World Health Organization per capita health spending targets for low-income countries.
While some floors include public sector wages, the majority exclude them. In fact, the IMF has often mandated the containment or reduction of governments’ wage bills. This is a contradiction, as teachers and nurses are at the heart of any successful social spending — and teachers are often the biggest group of public sector employees in every country. IMF projections in the loan programs for the countries in this study show that the share of government spending for public sector wage bills are set to undergo a significant drop. Such a consistent targeting of public sector wages undermines the effective delivery of quality public services.
They are not implemented:
Social spending floors take a backseat to austerity conditionalities. Madagascar failed to meet all its social spending targets, while diligently meeting targets to cut spending. This is part of an overall trend: one in three social spending targets (35%) were not implemented, while countries adhered to 85% of targets related to balancing budgets, often through cuts to public spending. Even though this constitutes an improvement compared to the previous decade, it is still far from enough.
Even worse, social spending floors seem to defeat their own purpose. The hope was that they should constitute a bare minimum of spending for countries and support them in expanding their social expenditure. In practice, when they are met, they act more as ceilings than floors. Of all social spending floors met by IMF borrowers, only two spent more than 10% over the spending target agreed with the IMF (likely only due to external financing and COVID-19-related spending).
A fig leaf for austerity:
While social spending floors may act as damage control for the painful reforms advanced by the IMF in its loan programs, they also appear to limit the social spending ambitions of governments. Beyond potentially helping some people survive painful economic adjustments, they likely have little or no impact on reducing inequality. Social spending floors have largely played the role of deflecting attention away from a more fundamental debate on the necessity of austerity and spending cuts. For every $1 the IMF encouraged a set of poor countries to raise inflation-adjusted social spending, it has told them to cut four times more through austerity measures. Social spending floors are arguably a fig leaf for austerity.
What needs to happen?
First, it is urgent that the IMF fundamentally changes its approach to economic reforms by ceasing to adopt austerity as the default policy. There are alternative measures that the IMF should be recommending countries adopt to ensure a more people-centered recovery. This is a must for the Fund to signal that it is serious about supporting countries in building their resilience through stronger social protection, health and education systems.
Second, the IMF should make social spending targets transparent. It should publish disaggregated spending data by sector and function to reflect how social spending was allocated between the different areas defined in the floor, such as social protection programs, education, and health spending. Other data on outcomes, such as number of people employed, and ratios of workers to pupils/ patients/ coverage of services should be incorporated. This data should enable cross country comparisons.
Third, the IMF should use social spending goals instead of floors. This can be done through setting social spending levels to, at a minimum, meet the spending goals and social outcomes set in countries’ development strategies. These should be social spending goals supported by macroeconomic frameworks that enable rapid progress towards the Sustainable Development Goals.
Finally, social spending measures in loan programs should aim to reduce inequality rather than just mitigate harm on the poorest people. They should not be used or seen by the IMF as a compensatory measure for other policy actions. If other policy actions are shown to increase inequality, they should not be implemented in the first place.
As concerns about the pandemic waned after the emergence of additional crises, inequality has disappeared from IMF discourse and more so from its practice. If the Fund were to be serious about addressing inequality it needs to make serious and fundamental changes to its approach to social spending and public services. The IMF’s responsibility in supporting countries address the inequality crisis is more important than ever.
Check out the full report “IMF Social Spending Floors: A Fig Leaf For Austerity?”.
This blog was written by Nabil Abdo, Oxfam International’s Senior Policy Advisor on IFIs.
