Fiscal consolidation under electoral risk

Abstract

The European debt crisis has uncovered serious tension between democratic politics and market pressure in contemporary democracies. This tension arises when governments implement unpopular fiscal consolidation packages in order to raise their macroeconomic credibility among financial investors. Nonetheless, the dominant view in current research is that governments should not find it difficult to balance demands from voters and investors because the economic and political costs of fiscal consolidations are low. This would leave governments with sufficient room to promote fiscal consolidation according to their ideological agenda. This article re‐examines this proposition by studying how the risk of governments to be replaced in office affects the probability and timing of fiscal consolidation policies. The results show that governments associate significant electoral risk with consolidations because electorally vulnerable governments strategically avoid consolidations towards the end of the legislative term in order to minimise electoral punishment. Specifically, the predicted probability of consolidation decreases from 40 per cent after an election to 13 per cent towards the end of the term when the government's margin of victory is small. When the electoral margin is large, the probability of consolidation is roughly stable at around 35 per cent. Electoral concerns are the most important political determinant of consolidations, leaving only a minor role for ideological concerns. Governments, hence, find it more difficult to reconcile political and economic pressures on fiscal policy than previous, influential research implies. The results suggest that existing studies under‐estimate the electoral risk associated with consolidations because they ignore the strategic behaviour that is established in this analysis.

Recalibrating social protection: Electoral competition and the new partisan politics of the welfare state

“…This measure defines the degree of electoral competition a party is facing as the probability of a vote shift occurring that changes the party's bargaining position in the legislature. And indeed, some studies can demonstrate how varying degrees of competition affect policy making and social policy more specifically (Hobolt & Klemmensen 2008;Immergut & Abou-Chadi 2014;Hübscher & Sattler 2017). Conceptually, the core of these measures lies in connecting shifts in votes to shifts in power.…”

“…Conceptually, the core of these measures lies in connecting shifts in votes to shifts in power. And indeed, some studies can demonstrate how varying degrees of competition affect policy making and social policy more specifically (Hobolt & Klemmensen 2008;Immergut & Abou-Chadi 2014;Hübscher & Sattler 2017). Crucially, in contrast to these studies, we are interested in the interaction of degrees of competitiveness with party strategies.…”

Housing Booms and Busts and Local Fiscal Policy

“…There are also a few papers that suggest that fiscal consolidation depends on how electorally vulnerable is the incumbent in charge of implementing the austerity measures (e.g., Hübscher and Sattler, 2016). Political myopia might also be behind the difficulty of adjusting the budget in bad times: if voters are uninformed and elections are contested the incumbent might find attractive to delay the required spending cuts and tax increases (e.g., Bonfiglioni and Gancia, 2013).…”

“…Note, however, that the same reasons that explain undersavings during the boom may generate incentives to delay the adjustment during the bust. Local governments facing competitive elections may fear implementing unpopular measures (e.g., Hübscher and Sattler, 2016), and the difficulty to sell austerity measures to the population might depend on the level of voter information (e.g., Bonfiglioni and Gancia, 2013). This second effect would work in the opposite direction than the first one, so the direction of the effect of these variables during the bust is uncertain.…”

Housing Booms and Busts and Local Fiscal Policy

“…Fifth, by studying the reaction during the bust we also contribute to a literature that examines the determinants of fiscal consolidation (see e.g., Alesina et al, 2006). There are also a few papers that suggest that fiscal consolidation depends on how electorally vulnerable is the incumbent in charge of implementing the austerity measures (e.g., Hübscher and Sattler, 2016). Political myopia might also be behind the difficulty of adjusting the budget in bad times: if voters are uninformed and elections are contested the incumbent might find attractive to delay the required spending cuts and tax increases (e.g., Bonfiglioni and Gancia, 2013).…”