Austerity Measures Threaten Children and Poor Households : Recent Evidence in Public Expenditures from 128 Developing Countries

In the wake of the food, fuel and financial shocks, a fourth wave of the global economic crisis began to sweep across developing countries in 2010: fiscal austerity. Serving as an update of earlier research by UNICEF, this working paper: (i) examines the latest IMF government spending projections for 128 developing countries, comparing the three periods of 2005-07 (pre-crisis), 2008-09 (crisis phase I: fiscal expansion) and 2010-12 (crisis phase II: fiscal contraction); (ii) discusses the possible risks for social expenditures; (iii) assesses the most common adjustment measures being considered by developing countries in 2010-11 and their potentially adverse impacts on vulnerable populations; and (iv) summarizes a series of alternative policy options that are available to governments to expand fiscal space and ensure a Recovery for All, including children and poor households. While most governments introduced fiscal stimuli to buffer their populations from the impacts of the crisis during 2008-09, premature expenditure contraction became widespread beginning in 2010 despite vulnerable populations’ urgent and significant need of public assistance. Our analysis confirms that the scope of austerity is severe and widening quickly, with 70 developing countries (or 55 percent of the sample) reducing total expenditures by nearly three percent of GDP, on average, during 2010, and 91 developing countries (or more than 70 percent of the sample) expected to reduce annual expenditures in 2012. Moreover, comparing the 2010-12 and 2005-07 periods suggests that nearly one-quarter of developing countries appears to be undergoing excessive contraction, defined as cutting expenditures below pre-crisis levels in terms of GDP. Regarding austerity measures, the scope of options under consideration in developing countries seems to have widened considerably since a pioneer expenditure analysis was carried out by UNICEF in October 2010 (“Prioritizing Expenditures for a Recovery for All”). An updated review of the latest IMF country reports shows that governments are weighing various cost-saving policies, including: (i) wage bill cuts/caps, including salaries of education, health and other public sector workers; (ii) elimination or reduction of subsidies, including for basic food items; and (iii) rationalizing social protection schemes by reforming pensions or further targeting social safety nets. Also widely discussed is the introduction or broadening of taxes, such as VATs, on basic products consumed by vulnerable populations. The paper questions if the projected fiscal contraction trajectory – in terms of timing, scope and magnitude – as well as the specific austerity measures considered are conducive to the objective of adequately protecting children and poor households and the achievement of development goals such as the MDGs. The paper encourages policymakers and development partners to evaluate the potential human and development costs of foregone social expenditures and to consider alternative policy measures to ensure a Recovery for All