Dismantling the myths around restrictive fiscal policies in Latin America

Publish Date: 
Monday, February 3, 2020

In December 2019, The Center for Economic and Social Rights (CESR) published a briefing entitled “Dismantling the Dogmas of Austerity and Fiscal Injustice in Latin America,” refuting 10 commonly held misconceptions about why fiscal consolidation policies are necessary. The briefing argues for progressive structural tax reforms that would be redistributive and, in the long run, will reduce inequality, guarantee human rights and promote sustainable development. 

The briefing recognizes that fiscal reform is urgently needed in Latin America to resolve pressing challenges, including addressing climate change and mitigating its consequences; eradicating poverty and implementing universal social protection; guaranteeing social services as rights and fulfilling the Sustainable Development Goals. 

Since 2018, Latin America has been witnessing a wave of widespread protests against austerity measures, regressive fiscal policies and continuing social inequalities. For example, Chile has witnessed violent protests despite its economic growth and decreased poverty rates. However, inequality in Chile persists; according to the Economic Commission for Latin America and the Caribbean, 1% of Chile’s population owns 26.5% of its wealth. 

The briefing recognizes that in recent years international and regional funding institutions have started to concur with civil society on the need to advance towards progressive fiscal policies by which those with more resources contribute more, alleviating the unfair burden on middle and low income sectors of the society. However, resistance to this proposition continues, according to CESR, rooted in myths that respond to the interests of the wealthy and corporations and feeds into the asymmetry of power over social movements and public interests in general. 

The ten myths that the briefing dismantles are:

  1. “Fiscal policy is fundamentally a technical matter, which has little to do with rights,” and should be decided upon exclusively in specialized institutions or in traditional political spaces, to the exclusion of other voices. 

  2. “There simply isn’t enough money for all these rights”: The briefing doesn’t deny the challenges imposed by limited public resources in allocating budgets to cover social needs. However it underlines the fact that such an argument is used to maintain the status quo of fiscal restrictions. States are obliged to mobilize resources to fulfill their human rights obligations. These obligations are not abstract or unachievable. States do have the power to mobilize additional resources and distribute them more justly to meet these obligations. 

  3. “Economic growth is enough, and that should be our priority”: This myth assumes that economic growth will eventually lead to poverty reduction and improvements in social services. However, as the briefing reveals, economists and human rights experts have asserted that poverty reduction cannot occur except with a broad framework of redistribution policies that include fiscal management. The briefing explains that in Latin American countries, income per capita exceeds the poverty line, which suggests that a key step towards poverty eradication is redistributive policies. 

  4. “The size of the State and the expense of maintaining it are out of control”: The briefing shows how public spending is a necessary component in guaranteeing rights and narrowing inequalities. 

  5. “The deficit is the real problem, and fiscal prudence demands we eliminate it”: According to the briefing, the fixation on fiscal deficits could be counterproductive for economic development and collective wellbeing. “States need to have the flexibility to run deficits, for example, to reactivate the economy or to stimulate it with strategic investment when financial conditions allow,'' the briefing asserts. “Social or investment spending is usually the first to go, insofar as those who are potentially affected lack the power to influence the decision makers who might look out for their interests.” 

  6. “When times are challenging, fiscal austerity is the only way”: The briefing asserts that there are alternatives that can also have a lesser impact on human rights. Austerity packages usually include severe cutbacks on social spending that can lead to violations of economic social and cultural rights. 

  7. “The short-term sacrifice of austerity will bring long-term gains”: This argument, the briefing states, has proven to not be true as hardly has the benefits of austerity measures been felt on the long run especially the burden is put on the less privileged. Also, low investment in social rights perpetuates poverty and other social and economic violations. These long term frustrations are linked to serious social conflicts and instabilities. 

  8. “The tax system has to be competitive so we must lower taxes on corporations and the rich”: The briefing shows how lowering taxes and creating tax havens actually has a negative impact on developing countries and drastically reduces state resources and thus its ability to meet its human rights obligations. 

  9. “Equality cannot be achieved through the tax system”: Referencing the Inter-American Investment Bank, the briefing shows that taxes are not only a source of revenue for states. They also are a powerful instrument that helps redistribution of wealth and advances towards a more egalitarian society that is undergoing development. 

  10. “Combating corruption is enough and structural tax reforms are not necessary”: The briefing stresses that fighting corruption, while important, does not make tax reforms unnecessary. The narrative that focuses only on fighting corruption ignores the amount of resources lost as a result of tax privileges and tax havens. Any fiscal policy should be holistic and sustainable with a clear aim of reducing inequalities.  

Fiscal policy is a set of instruments governing the relations between the state and its citizens in matters relating to public resources. The briefing ascertains that fiscal policy is a human rights issue. Without adopting a human rights framework to fiscal policy, we are denying different sectors in our society from accessing basic and necessary services. 

+ For more information and to read the briefing, please click here