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Info Service on Finance and Development (Nov25/01) By Maria Syed The recent launch of the International Monetary Fund (IMF)’s latest Fiscal Monitor report Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth at the 2025 IMF–World Bank Annual Meetings was marked by Vitor Gaspar, Director of the Fund’s Fiscal Affairs Department. Gaspar observed that “while … the fiscal equation is very hard to square politically, the time to prepare is now”, emphasizing that strengthening trust in government is central to balancing the fiscal equation and fostering prosperity. He underscored that governments should “focus on changing the composition of public spending, prioritizing education and health, while keeping the overall spending envelope constant”. Yet a key question persists: to what extent do IMF policy measures and recommendations confront the structural debt-to-austerity traps that continue to constrain fiscal space, particularly in middle- and low-income economies already burdened by high climate vulnerability and development financing needs? Despite its emphasis on efficiency and reform, the Fiscal Monitor reveals that the IMF engages only selectively with the structural budgetary constraints that hinder investment in resilience, equity, and long-term growth. The main highlights A closer examination of the Fiscal Monitor report reveals several key themes post-pandemic and other external shocks, including geopolitical risks and stringent tariff measures. The Fiscal Monitor highlights that enhancing spending efficiency can substantially amplify economic gains. Specifically, improving allocative efficiency and closing spending gaps could raise long-term output by up to 1.5 percent in advanced economies and between 2.5 and 7.5 percent in emerging market and developing economies, with faster progress delivering even greater dividends. The report identifies institution-building reforms, particularly those combating corruption and enhancing transparency and accountability, as central to this agenda. It calls for robust expenditure controls, timely budget publication, and reinforced public investment management systems, especially through improved project appraisal and consistent maintenance funding. Another key message is the expansion of private sector participation, whether through outsourcing non-core government functions or partnering on investment projects. Such collaboration, the report suggests, can improve spending efficiency and create fiscal space, but only if fiscal risks are effectively managed. Likewise, better targeting and consolidation of social assistance programmes, particularly in low-income developing countries, is seen as a means of alleviating fiscal pressures while enhancing social spending effectiveness. Governments are further encouraged to institutionalize spending reviews to optimize resource allocation and ensure public funds generate long-term and measurable outcomes. Integrating such reviews into broader budgetary processes is deemed crucial, as for countries with limited administrative capacity, adopting core elements such as benchmarking and performance indicators offers a scalable approach to improving fiscal performance. The country examples included in the report serve to illustrate various fiscal and economic situations across different regions and income groups. They highlight the diversity in fiscal policy, debt levels, and economic dynamics among advanced economies, emerging markets, and low-income countries. For instance, the inclusion of major economies such as the United States, China, and European countries demonstrates their significant influence on global fiscal trends and uncertainties. The mention of countries like Nigeria, Ghana, and Bangladesh emphasizes challenges faced by low-income and developing nations, such as limited fiscal space and external vulnerabilities. Additionally, examples like Argentina, Brazil, and South Africa demonstrate the complexities of managing fiscal deficits and debt in middle-income countries, often affected by fluctuating commodity prices and capital flows. Overall, these country examples provide context on fiscal health, policy responses, and vulnerabilities that shape global and regional economic outlooks, illustrating the varied circumstances and policy challenges faced worldwide. What’s missing? The Fiscal Monitor underscores the centrality of prudent fiscal management and institutional trust through a persistent focus on “pro-growth public spending” and “allocative efficiency”, while marginalizing critical analysis on income and asset redistribution and public financing for social provisioning, including essential public services. Social infrastructure such as water provision, early childhood education, and care services play a pivotal role in enhancing labour productivity and reducing unpaid care burdens, yet receive limited analytical attention. As has been noted, fiscal discipline frameworks that impose strict limits on government borrowing and expenditure through debt-to-GDP ratios and fiscal rules tend to restrict investment in both social and physical infrastructure. The segmentation of budgets into current and capital expenditures further narrows fiscal space, ignoring the long-term growth potential and multiplier effects of productive public investment. This short-term objective systematically underestimates the benefits of social infrastructure required to promote gender equality. Moreover, prevailing fiscal assessment models often neglect the dynamic relationship between public investment and sustained growth, thereby reinforcing restrictive policies that impede development-oriented public financing. The mention of public spending rigidity in the Fiscal Monitor also merits closer scrutiny. While structural and institutional factors such as multi-year budget commitments and political economy constraints are repeatedly identified as sources of rigidity, key external drivers are omitted. These include conditionalities arising from IMF surveillance mechanisms, especially Article IV surveillance, structural adjustment programmes, and credit rating downgrades that effectively limit fiscal policy space. Such measures are typically inscribed into wage bill freezes, subsidy removals, and reductions in health and education budgets, opting for more deregulation policies. Research conducted by Ortiz and Cummins in 2023 identified two major waves of contractionary shocks in 2010–11 and 2016–20, with the latter projected to affect 83 percent of the population in developing countries compared with 61 percent in high-income economies. Recent findings have also reaffirmed that the IMF’s core policy discretion has remained consistent over 14 years, identical to fiscal consolidation or structural adjustment programmes consisting of austerity measures. The data reveals the inconsistency between the increase in narratives around social and gender impacts, and the inadequate and incoherent policy responses to cater to those narratives. Additionally, the Fiscal Monitor’s characterization of public wage expenditures as excessive, at about a quarter of total public expenditures, rests on the problematic assumption that such spending distorts private sector activity. This framing ignores the empirical reality that, in many developing economies, the public sector remains the primary provider of formal employment and essential services. According to figures from the International Labour Organization (ILO), women make up 47 percent of all public servants. Globally, the share of women employed in the public sector (13 percent) is higher than that of men (10 percent). Recent statistics show that, on average, public sector employment accounts for 11 percent of total employment worldwide. Evidence accumulated over decades demonstrates that wage bill cuts, often imposed through IMF conditionalities, have exacerbated gendered inequality, increased unemployment, and weakened state capacity. Over the past four decades, IMF lending programmes have required borrowing countries to implement extensive structural reforms that, in many cases, have undermined the social contract, leading to utility subsidy eliminations and the rationalization of social protection programmes framed as temporary and targeted, while maintaining so-called macro-critical social floors. These conditionalities typically include cuts to public sector wages and spending, especially in health, education, and social protection, alongside regressive taxation, privatization of public services and state enterprises, labour market deregulation, inflation targeting, trade and capital account liberalization, central bank independence, and expanded natural resource extraction. Economically, such measures have hampered the public sector and reduced disposable incomes and domestic demand, while increasing dependency through the privatization of natural resources and the erosion of state capacity. These have deepened intersectional inequalities, particularly along gender, racial, and class lines, perpetuated intergenerational poverty by diminishing livelihoods and employment opportunities, and sparked rising political unrest. The latest Fiscal Monitor report emphasizes that well-designed fiscal measures, particularly allocative spending on health, education, and infrastructure, are vital for enhancing productive capacity and promoting inclusive growth. It advocates that such spending be efficient, transparent, and precisely targeted. The report’s call for fiscal reforms implicitly includes fiscal consolidation. During periods of instability, “support measures for vulnerable sectors should be timely, temporary, and targeted, while maintaining fiscal discipline and public trust”. Although this framework promotes the doctrine of sound finance, it implicitly advances what can be characterized as a Washington Consensus 2.0, a rebranded institutional good governance agenda that obscures structural dynamics whereby sovereign debt is reproduced by way of the extractive terms of bond contracts and the cost of borrowing set by private creditors and rating agencies and the lack of monetary sovereignty in most developing countries, for example. This becomes evident in the report’s fleeting mention of debt servicing, framed merely as a fiscal pressure among others, such as defence spending or aging populations. By neglecting systemic issues such as the pressure to enact sound finance, or contractionary fiscal and monetary policy, the pro-cyclical volatility of financial liberalization, commodity price fluctuations, and a global financial architecture that constrains macro-policy space and autonomy, the analysis reduces systemic inequities to a question of domestic inefficiency while stipulating pro-capital solutions such as policies that enforce privatization for domestic resource mobilization. The result is a narrowing of the fiscal policy agenda to governance and competitiveness reforms aligned with ease-of-doing-business narratives, while occluding the role of the international debt architecture in perpetuating fiscal vulnerability. While the Fiscal Monitor consistently observes that public investment in productive capacity has stagnated, it fails to situate this within the context of escalating debt distress, particularly in the post-pandemic period. With many developing countries allocating around 38 percent of their public revenues to debt servicing, the feasibility of expanding fiscal space for productive investment remains up in the air. By depoliticizing the debt regime, the report risks portraying austerity not as a structural constraint but as a matter of domestic policy choice. This contradiction exposes the enduring tension between the IMF’s rhetorical commitment to inclusive growth and the austerity policy prescriptions it continues to promote.
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