Punished for austerity
Faced with international pressure and a public debt out of control, the Greek government implemented large budget cuts in response to the great recession. In the following election, the largest government party, PASOK, got their vote share reduced from 44 to 13 per cent. Greece is not alone. In the wake of the great recession, many countries will have to consolidate public finances. But is it possible to find political support for reducing debts and deficits, or does the Greek fate await any government that implements tax hikes or cuts in public spending?
The assumption that voters punish governments for fiscal austerity is a defining feature of many theories central to both economics and political science. It is one of the core assumptions of the new politics of the welfare state, it is supposed to give rise to political business cycles and it is a cornerstone in the public finance literature.
Considering its real-world implications and theoretical importance, surprisingly few attempts have been made to test this assumption. Even more striking is the fact that most empirical evidence suggests that there are no electoral consequences for governments that pursue austerity measures (Alesina et al 2012, Giger 2012), or that fiscal adjustments actually improve the chances of re-election (Brender 2003, Brender and Drazen 2008, Drazen and Eslava 2010). How is it possible that these studies contradict what appears so obvious at first sight?
In this paper I argue that previous research has underestimated the true effects because of two identification problems. First, it is possible that governments that are confident in being re-elected are more likely to consolidate public finances. Second, budget improvements often result from favourable economic conditions rather than discretionary fiscal consolidation. Both those problems make fiscal adjustments appear more popular than they actually are.
When the variables used in previous research are replaced by variables less susceptible to estimation bias, the results indicate that parties which implement fiscal adjustments are punished by the voters. The estimated effects are large. For every percent of GDP with which the budget balance is improved, the vote share for each government party is predicted to fall with one percentage point.
I also examine whether the electoral consequences differ depending on the transparency of fiscal consolidations and the degree of political accountability. I find that voters react more strongly to transparent adjustments and that parties to which the prime minister belongs are punished harder than other government parties.
Alesina, Alberto, Dorian Carloni and Giampaolo Lecce (2012) ‘The Electoral Consequences of Large Fiscal Adjustments’. Fiscal Policy after the Financial Crisis. University of Chicago Press, pp. 531–570.
Brender, Adi (2003) ‘The effect of fiscal performance on local government election results in Israel: 1989–1998’. Journal of Public Economics 87.9-10, pp. 2187–2205.
Brender, Adi and Allan Drazen (2008) ‘How do budget deficits and economic growth affect reelection prospects? Evidence from a large panel of countries’. The American Economic Review 1993, pp. 2203–2220.
Drazen, Allan and Marcela Eslava (2010) ‘Electoral manipulation via voterfriendly spending: Theory and evidence’. Journal of Development Economics 92.1, pp. 39–52.
Giger, N. and M. Nelson (2012) ‘The Welfare State or the Economy? Preferences, Constituencies, and Strategies for Retrenchment’. European Sociological Review 29.5, pp. 1083–1094.