Growth Models Under Austerity

Abstract

Fiscal policy is an integral part of a country’s growth model. This chapter shows how governments subordinate their fiscal policy to the macroeconomic regime of their country: governments in export-led economies are two to three times more likely to pursue fiscal austerity than those in demand-led regimes. These rigid fiscal policies in many countries are not in line with voter attitudes and individual-level macroeconomic beliefs. Contrary to the economic ideas that provide the intellectual foundation of fiscal austerity, voters believe that these policies are detrimental to economic growth, but there is great variation between left and right voters. These ideological differences translate into distinct fiscal policies under left and right governments in balanced growth regimes, but not in unbalanced regimes. These results point to a mismatch between government policy, especially in export-led economies, and voter attitudes. This mismatch potentially contributes to the disillusionment of voters that has been observed in many countries.

Does Austerity Cause Polarization?

“…Finally, and related to the previous point, mainstream parties implement austerity despite the risk that dissatisfied voters abandon them. International political integration, the establishment of the Eurozone and the related fiscal rules induce governments to pursue similar, low-deficit fiscal policies (Hübscher and Sattler 2022). In addition, international financial markets impose constraints on fiscal policy, especially on public deficits and debt (Mosley 2000).…”

Macroeconomic ingredients for a growth model analysis for peripheral economies: a post-Keynesian-structuralist approach

“…Second, the treatment of the state does not correspond to the potentially critical role of government policies in PKE. For example, Hübscher and Sattler (2022) subordinate fiscal policy to the growth model. Thus conceptually, the state is not considered as playing an independent role in determining the growth model.…”