Economic austerity today affects approximately 85% of humanity. For many developing countries that have signed onto International Monetary Fund (IMF) loans, mandated spending cuts often lead to contracting economies, deepening socioeconomic inequality, rising unemployment, and mass social protests. This undermines democratic governments and strains social cohesion, leading to more authoritarian forms of rule and social and political instability.
Empirical evidence implicates the IMF loan programs and national surveillance advice in a rise in inequality, primarily driven by income losses among the poor. Inequality has become a global emergency over the past 40 years, with 41% of all wealth growth going to the top 1% while the bottom 50% receives only 1% of that growth. While such extreme inequality has numerous grave consequences, two must be heeded: 1) economic performance is undermined, and 2) democracy is compromised by the influence of elites. The parallel trajectories of inequality and democracy are telling. In 2005, 50% lived of the world’s population lived in a democracy. Today, only 25% live in a democracy.
A 2024 global index revealed that 94% of countries with IMF loans cut public spending in health, education, or social protection. Research conducted in 2025 found that lower-income countries that have been refused the opportunity to seek debt relief by the IMF have instead cut health and education spending by a sixth. As indebted countries are required to sign onto an IMF loan before they can commence debt restructuring, the fund facilitates repayment of foreign debt by cutting public investment in key services and systems. The United Nations warns that such measures will push an additional 100 million people into poverty.
The U.S. government holds over 16% of the IMF’s voting shares, making it the largest single voting bloc with unique leverage over the operations of the IMF and the fate of billions of people. This leverage in decision-making implies that the U.S. possesses significant influence to reorient policies and practices that shape grounded realities across the Global South. Under the mandate of the IMF's Executive Board, the U.S. has the potential to redress the economic violence of austerity, which subjects the international community to a protracted state of shock absorption and accelerates the global economic downturn already underway.
The 1972 Declaration on the Establishment of a New International Economic Order stated, "The prosperity of the international community as a whole depends upon the prosperity of its constituent parts." This could not be truer today in an era of “polycrisis,” where a multiplicity of systemic shocks — from climate to conflict — are deepening divides, rupturing cohesion and cooperation, and most importantly, eroding the mutual trust indispensable for multilateralism.
Austerity's Impacts
Global austerity has exploded since the inception of the COVID pandemic. The IMF has provided over $300 billion in financing to over 96 countries through approximately 107 loan facilities. By mid-2021, 91 of these loans either recommended or required countries to adopt austerity. By 2024, Oxfam researchers found that “59 out of 125 low- and middle-income countries are expected to spend less than during the 2010s, exposing … 2 billion people to the harmful consequences of budget cuts.” Over the last five years, over 6 billion people have lived in the grip of economic austerity, 80% of whom live in the Global South.
Examples of fiscal austerity measures include:
- Increasing regressive taxation measures, such as Value-Added Taxes (VAT), an indirect tax that tends to be regressive and exacerbate inequalities (in 86 countries);
- Reducing social protection budgets (in 120 countries);
- Cutting or capping the public-sector wage bill (in 91 countries);
- Privatizing public services and reform of state-owned enterprises (in 79 countries);
- Pension reforms (in 74 countries);
- Wage reductions and erosion in labor rights (in 60 countries); and,
- Cutting health and education expenditure (in 16 countries).
The literature examining austerity shows that social inequalities and discrimination intensify on the basis of income level, gender, and race, resulting in significant increases in material deprivation and intergenerational poverty. In particular, women are harmed disproportionately through three key channels. First, as the majority of employees within and users of public social services in developing countries; second, as the majority of care workers in the unpaid and paid care economy; and third, as debtors of informal and private lenders of credit. Women are de facto involuntary shock absorbers of austerity measures, compensating for services the state cannot afford to provide.
Experiences with Austerity: Kenya and Sri Lanka
Kenya is under a 38-month IMF program initiated in April 2021, which issued $3.6 billion and mandates regressive tax measures and subsidy removals. A major stated aim of these measures was to reduce the fiscal deficit from 5.1% of GDP in 2024–25 to 3.8% in fiscal year 2025–26. Measures include:
- A doubling of the VAT on fuel;
- Complete removal of fuel and maize flour subsidies;
- A 16% VAT on bread, onions, potatoes, and imported eggs;
- Increases in excise duty on money transfer services from 15% to 20%; and
- An eco-levy on locally manufactured and imported goods, including sanitary towels and diapers.
Meanwhile, the percentage of export revenues Kenya allocates to servicing external debt has soared from 19% in 2019 to nearly 50% in 2026, implying that Kenya deployed half of its export revenues to pay interest on its external debt. Public backlash against austerity exploded in 2024, leading to mass protests, social upheaval, fatalities, and police repression. Consequently, the 2024 Finance Bill was withdrawn, forcing the government to replace VAT with public spending cuts of over 11% in key sectors such as education and agriculture to meet fiscal deficit targets.
After debt default and amid economic crisis, Sri Lanka signed on to a 48-month program with the IMF in March 2023. The program mandated a stringent fiscal austerity aimed at "revenue-based fiscal consolidation" to reach a primary surplus of 2.3% of GDP by 2025.
The conditions include:
- Shrinking the public wage bill;
- Eliminating government subsidies for electricity and fuel;
- Increasing VAT to 18% and expanding it to cover previously exempt essential items; and
- Lowering the tax-free threshold on the national personal income tax, bringing many lower-middle-income earners into the tax net for the first time.
These reforms caused political turmoil and social unrest, with over a third of Sri Lanka’s population falling into poverty and the national poverty line rising sharply due to inflation. Real wages for public and private sector workers contracted by 22% and 16.9%, respectively, between 2021 and 2024. In early 2022, Sri Lankans faced power cuts and shortages of basics like fuel.
In 2024, Sri Lanka’s finance minister said household spending on tuition fees was the equivalent of approximately 40% of total public education spending. Between 2000 and 2020, the share of households with school-age children that spent money on private tuition increased from 41% to 65% in urban areas, particularly among the poorest segment of Sri Lanka’s population. In the health sector, acute shortages of essential medicines, medical devices, and personnel constrain equitable and affordable access to free healthcare services for the majority of the population.
How the U.S. Can Help
In light of the United States being the largest shareholder in the IMF and the only nation with veto power over decision-making in the IMF Executive Board, the following policy recommendations are addressed to the U.S. Congress, specifically the House Financial Services Committee, which has regulatory oversight over international financial institutions.
Members of the U.S. Congress should recognize the following:
- IMF-mandated fiscal austerity measures have severe economic consequences, triggering social unrest and political and economic instability.
- Progressive income taxation that funds subsidies for health, education, and social protection must reframed from “consumption” to “investment.” Public expenditures are currently categorized as consumption, and therefore, discretionary and short-term. This fails to account for the feedback loop between sustained, long-term investment in public systems and increases in labor productivity, economic growth, and social equality. If fiscal calculations account for the regeneration of employment, wages, and tax revenues in a medium- to long-term timeframe, the economic expansion and social stability generated can potentially finance outstanding debts and deficits while preventing economic crisis and social inequalities.
- The public sector workforce, financed by the public wage bill, is central to the infrastructure of developing countries. Significant scaling up of the public sector workforce will also be necessary to respond to the climate crisis.
Members of the U.S. Congress should request the following from the IMF:
- Support more ambitious and successful debt cancellation and rescheduling, while supporting indebted governments to restructure their debts.
- Set and act on ambitious targets for progressive tax reforms, increasing tax-to-GDP ratios by at least 5% by 2030 through progressive taxes, especially on wealth and corporations, financial assets, and property.
- Set incremental targets to increase the public sector wage bill in order to reinvigorate public services after decades of decline, using international benchmarks on education and health sector financing.
- Commit to supporting states realize the right to social protection. This involves establishing or strengthening rights-aligned universal social protection systems through progressive revenue-raising measures rather than reallocating resources or budget cuts, beginning with the establishment of social protection floors for children; those unable to earn sufficient income; and in cases of sickness, unemployment, and disability; older persons; and informal workers.
- Under the Special Drawing Rights Act, the U.S. Treasury can approve SDR allocations by the IMF without new congressional legislation, provided the U.S. share does not exceed its IMF quota. There was an extraordinary SDR allocation of $650 billion implemented in August 2021 during the COVID-19 pandemic, which developing countries used to shore up their reserves and stabilize their currencies, pay down debt, and/or support the national budget for economic and social recovery. The ongoing debt crisis and global austerity drive warrant another SDR allocation to ensure global economic stability.
