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Fiscal Fallacies: 8 Myths about the 'Age of Austerity'

Myth #7: Austerity is justifiable because there are no other alternatives.

The continuing economic crisis seems also to have prompted a crisis in innovative policy ideas and alternative financing arrangements. Governments promoting austerity policies consistently fall back on the argument that the economic crisis—no matter the causes—has tied their pocket books, with no other solutions except backsliding in public expenditures on economic and social rights programs.

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For many countries, perhaps the biggest fiscal fallacy is that there is any fiscal crisis at all. Austerity is neither necessary nor is it inevitable. Resources abound in many countries, if governments would only take steps to properly generate and channel them into protecting and fulfilling their human rights duties, as is their duty under international law.

Alternatives to austerity are in fact numerous. Evidence from UNICEF suggests that opportunities to identify and expand countries’ resource bases are abundant, and that more expansive fiscal policies are on the whole completely feasible in financial terms. Each country is unique, with potential risks and trade-offs at every step, but generally speaking governments have five sets of tools to mobilize and use resources effectively—together referred to as the Maximum Available Resources (MAR) Star: 1) Re-allocation of government expenditure to more rights-realizing programs; 2) Increasing government revenue, especially through tax policy in equitably ways; 3) Improving monetary policy and financial regulation to protect rights; 4) Deficit financing or restructuring existing debt, and finally, for some countries, 5) Raising funds through international cooperation.

Let’s start with tax policy. Taxation is a key vehicle for redressing social inequalities, and goes to the heart of the accountability bond between a State and its people. Progressive, non-discriminatory tax policies carried out by capable and accountable tax authorities can generate substantial sums to offset public budget deficits and compensate for the social costs of the crisis, especially in countries with very low tax bases, such as Ireland and Guatemala. New sources of financing are also quite feasible, such as financial transaction taxes (FTT) or the Robin Hood Tax, which have been proposed as a way of promoting greater financial sector accountability, mitigating some of the worst forms of speculation, while simultaneously recuperating some of the public costs incurred as a result of the global financial and economic crises. According to a study by Bill Gates for the G-20, at its lowest rate the FTT would yield about $48 billion across the G20, with higher rates offering up to $250 billion dollars per year.

Illegal tax evasion by companies and rich households meanwhile causes an endemic drain on the availability of revenues for the progressive realization of rights, especially in countries with already high levels of poverty, inequality and already low tax bases. Governments worldwide lose $3.1 trillion annually to tax evasion, according to estimates. This equates to about half of the world’s total expenditure on healthcare. While high-income countries are among the biggest losers in absolute terms, low- and middle-income countries are particularly vulnerable to tax evasion. Official studies put the amount lost to illegal capital flight in developing countries at between 6-9 per cent of GDP. This is on average half these countries’ total tax take of only 13 per cent of GDP. In Europe, meanwhile, financial modeling shows that had the UK government taken decisive steps to end illegal tax evasion between 1997 and 2010, there would simply be no debt in this highly-indebted country. Spain meanwhile loses €88 billion annually to tax evasion, 38.5 of which could easily be captured with the right policies according to estimates by the country’s Union of Tax Inspectors. Instead, the government decided to slash public spending by €18 billion through historic cutbacks to public expenditure in education, health, research, employment programs and infrastructure. As summed up unambiguously by the UN Special Rapporteur on Extreme Poverty, “A human rights approach … requires States to take steps to eliminate the prevalence of tax evasion, a problem that reduces the resources available for measures to realize human rights.”

Meanwhile, monetary policy alternatives, like those in Argentina, which balance inflation stabilization with full employment-oriented targets and financial stabilization functions can mobilize countless resources to offset decreased revenues in hard times. Facilitating rights-fulfilling financing and directed credit toward strategic, decent-job generating sectors could also make economic growth more inclusive and employment-intensive.

For countries with high levels of sovereign debt (especially debt accrued illegitimately), meanwhile, debt restructuring presents real possibilities to prioritize obligations to the wellbeing of their people over commitments to their creditors. Debt relief and restructuring efforts in the past have been widely successful. The heavily indebted poor countries (HIPC) debt relief efforts helped to cut debt repayments from 20 per cent of government revenue in 1998 to less than 5 per cent in 2010, according to studies.  This has for the most part allowed governments to re-invest in essential social and economic programs. Primary school enrolment jumped to 82 per cent from less than 50 per cent in the late 1990s in Tanzania, for example, after school fees were abolished as a result of the country being granted debt relief in 2001.

In an unprecedented step, Norway became the first creditor nation to assume co-responsibility for the adverse human impacts of its own development loans in 2006. Deeming its Ship Export Campaign a “development policy failure,” Norway unilaterally cancelled the relevant debts of five countries, among them Ecuador, which in 2004 spent six times more in debt servicing than health care. In doing so, Norway became the first creditor country to cancel debt in the name of justice rather than in reference to the borrowing country’s levels of indebtedness or poverty alone.

The human rights impacts of debt servicing and other financial obligations have been of consistent concern to human rights treaty bodies. A recent visit to Latvia by the the UN Independent Expert on Foreign Debt and Human Rights evaluated the human rights impact of the European Union and the International Monetary Fund stabilization program in the country. With wide stakeholder support, this human rights expert is also developing a set of Guiding Principles on Foreign Debt and Human Rights to give clear direction to lenders and borrowers on how to balance a debtor State’s contractual obligations arising from its external indebtedness with its international legal obligations to respect, protect and fulfill all human rights.

UNCTAD has long called for a more balanced approach to sovereign debt restructuring, including a fairer burden of adjustment between borrowers and private sector creditors. It advocates a temporary debt standstill, whether debt is public or private, accompanied by exchange controls, including the suspension of convertibility for foreign currency deposits and other assets held by residents as well as non-residents. More controversially, UNCTAD says the IMF should not be involved in the negotiations between sovereign debtors and private creditors since countries affected are among the shareholders of the fund, which is also a creditor. Rather UNCTAD argues for an independent and fair international arbiter, which would allow debtor countries in difficulty to declare a unilateral “standstill” on debt payments, with creditors having to abide by the terms for debt restructuring as decided by a fair and independent debt workout procedure. More fundamentally, civil society groups are calling for a rethink of current debt sustainability criteria that would not be based on debt-to-export ratios, but on sustainable development criteria and human rights norms and principles.

Human rights responses

International human rights law, as specified in the ICESCR and the International Covenant on the Rights of the Child, compel governments to use the maximum of available resources to realizing economic and social rights. Availability does not only refer to resources under the command of the government, but those that could be available through international cooperation or improved management and generation of resources. In this sense, governments, in complying with their international commitments, are responsible for exploring alternatives and where possible broadening their fiscal space by mobilizing the maximum amount of resources possible in equitable, participatory, transparent, accountable rights-realizing ways.

This briefing can be accessed in pdf format here.