More IMF research confirms austerity increases inequality


The IMF has released another research paper on the impact of austerity policies, this one produced by the Fund’s fiscal affairs department, which confirms what trade unions and many independent researchers have asserted for years: the austerity policies applied in Europe and other regions increase inequality of income distribution, in particular when they are weighted towards spending cuts rather than tax increases.

As per usual practice when issuing research papers that appear to be at odds with IMF practice (unless one surmises that the IMF is deliberately seeking to increase inequality), the Fund specifies: "The views expressed in this Working Paper are those of the authors and do not necessarily represent those of the IMF or IMF policy."

The study presents regression analyses of the impact of fiscal consolidation (i.e. deficit-reduction) in 17 OECD countries during 1978-2009 and finds that consolidation was associated with increased income inequality.

It also examines twelve specific case studies of "large fiscal consolidation episodes", six of them spending-based and six of them tax-based.

It finds that the former had a stronger impact in increasing inequality than the latter, especially when social spending was not protected in across-the-board cuts.

According to this new IMF working paper, fiscal consolidation increases inequality both through the direct negative impact on lower-income beneficiaries of government programmes and because consolidation boosts unemployment.

The findings of this study confirm those of a paper on the same topic produced by a separate team from the IMF’s research department, which we summarised in July.

Below is the abstract for " Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy: What Do the Data Say?"

The full paper (37 pages) is available on the IMF’s web site.