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Dismantling the Dogmas: Tools for Tackling Austerity in Latin America

December 18, 2019
In a time when conventional wisdom is being challenged by mass popular protests against inequality and human rights breaches in Latin American countries encumbered by austerity regimes, a new briefing by CESR confronts head-on some of the dogmas that are most frequently deployed against progressive structural fiscal reforms that could ameliorate such problems.
Dismantling the Dogmas of Austerity and Fiscal Injustice in Latin America, drawing on empirical evidence, interviews with knowledgeable experts, and regional and international human rights conventions, debunks 10 commonly held misconceptions about why fiscal consolidation policies are necessary. In the process, it makes a strong case for progressive structural tax reforms that are redistributive and would, in the long term, reduce inequality, guarantee rights and promote sustainable development. Crucially, the briefing argues that clawing back the fiscal resources lost to corruption, tax evasion and avoidance, and illicit financial flows would contribute significantly to closing the gap in financing required to address complex problems such as poverty, climate change and compliance with the Agenda 2030 Sustainable Development Goals (SDGs). 
As CESR has reported in the past, austerity has become the dominant fiscal policy paradigm, with an estimated two-thirds of countries worldwide adopting “reform” packages intended to defray national deficits.  Severe cuts in social spending, the dismantling of social protection policies, and regressive adjustments to labor market and social security systems have been implemented in many Latin American countries, negatively affecting human rights enjoyment and the wellbeing of ordinary citizens, hitting hardest the poorest and most socially disenfranchised groups, such as women, Indigenous peoples and Afro-descendant communities.
The briefing explains how persistent and misleading dogmas arguing against structural fiscal reforms consistently flood public debates, despite the fact that a wide range of actors agree that progressive reforms, instead of constraints on public spending, are needed to address fiscal imbalances. Progressive direct taxation, the elimination of ineffective tax incentives, and the empowerment of tax administrations to combat tax evasion and tax avoidance have all been recommended, but political resistance tied to powerful vested interests has thrown up considerable obstacles. Wealthy elites and large corporations play a large part in sustaining the rhetorical devices that argue against progressive, structural reforms, according to the briefing.
Dismantling the Dogmas demystifies many potent, but inaccurate, assumptions, such as the dogma that says deficits can only be diminished by austerity adjustments when, in fact, evidence from the region shows that fiscal imbalances are more frequently due to weak tax collection. Additionally, the assertion that austerity is an adequate response for overcoming the chilling effect that deficits have on investors and creditors who fear that states cannot pay their debt is refuted by evidence from countries such as Brazil and Argentina, which shows that draconian austerity measures actually proved ineffective and failed to restore confidence in the economy.
A related dogma claiming that equality cannot be achieved through the tax system is rebutted by the fact that truly redistributive taxes fuel much more than just revenue production. Beyond generating resources necessary for government functions, fairer taxation also contributes to building more egalitarian societies by stimulating development practices that are more redistributive. In Latin America, where most fiscal revenue comes from indirect means, such as the value-added tax (VAT), the redistributive capacity of tax systems is limited and low-income groups, such as women, are negatively impacted. By more aggressively pursuing revenue from direct taxation, including property and income tax, governments could significantly raise their levels of redistribution and equality.
One particularly insidious dogma identifies corruption as the primary cause of fiscal imbalance, making structural tax reforms unnecessary. The briefing argues that, while the loss of tax revenue to corruption in public administrations should not be ignored, it is also important to focus on the serious problems of tax abuse (tax evasion and avoidance) and illicit financial flows taking place in the private sector. Indeed, corruption must be understood in all its manifestations, including the way in which decision making is captured to implement tax and fiscal policies that benefit powerful groups with vested interests. 
The evidence and arguments advanced in Dismantling the Dogmas seek to refute the accepted beliefs dominating popular discourse in Latin America, which justify the implementation of austerity measures and unfair fiscal policies that benefit only a few and harm many. The briefing’s authoritatively argued conclusions equip actors in social movements and civil society with critical tools necessary for neutralizing those misconceptions, providing fiscal alternatives that are both progressive and redistributive. The briefing adds to CESR’s growing body of work calling for new fiscal and economic models in the Andean Region that would reduce inequality, guarantee rights and promote sustainable development.
This briefing is available in English and in Spanish.
Image of a protester in Bogotá is courtesy of Christian Sanchez @ishamp/Instagram.