The politics of fiscal consolidation revisited

Abstract

This paper examines the capacity of governments to implement fiscal reforms in times of austerity. Unlike existing studies, which mostly focus on gradual policy changes like government spending, this analysis distinguishes between consolidation events and consolidation size to examine fiscal reforms. This strategy clarifies contradictory results in previous research and yields new insights into the underlying mechanism of fiscal reform. Based on an action-based data set that includes information about discretionary changes in taxation and government spending policies from 1978 until 2009 for 16 advanced (OECD) countries, the study shows that left and right governments are equally likely to implement cuts. Strategic considerations play a major role for the timing of fiscal consolidation, as the probability of fiscal cuts is highest at the beginning of the legislative term. When governments reform, the left cut as much as necessary, whereas right governments take the opportunity to reduce spending more

Fiscal consolidation under electoral risk

“…This suggests that parties matter less for the basic direction of fiscal policy as defined by the trade‐off between aggregate deficit‐spending or consolidation. Within this basic direction (i.e., given that governments decide to consolidate), parties may still be important for the specifics of consolidations, like exact consolidation size (Hübscher ) or the implications for particular policy areas (Armingeon et al. )…”

“…Left governments, therefore, may be more sensitive to the electoral costs of retrenchment than right governments because their constituencies rely more on the state (Giger & Nelson ). If this is the case, we should see a difference between left and right parties in power when it comes to implementing fiscal consolidations (Hübscher ). At the same time, large‐scale fiscal consolidations differ from the specific, tailored socioeconomic reforms that this previous research examines.…”

The politics of social spending after the Great Recession: The return of partisan policy making

“…Researchers have tried to understand the reasons for variations in governmental response with most focusing on the overall fiscal policies implemented (Armingeon, 2012;Hübscher, 2016;Raess & Pontusson, 2015). However, Armingeon, Guthmann, and Weisstanner (2016) have examined changes in social expenditure in the immediate aftermath of the recession.…”

The Political Economy of Financial Markets

“…Conversely, crisis resolution is widely ascribed to the European Central Bank and its commitment to providing unlimited financial support with the Outright Monetary Transactions program in summer 2012, which had a large effect on interest rate spreads (De Grauwe & Ji, 2013;Chang & Leblond, 2015). This heightened the tensions between government "responsibility" toward systemic constraints and "responsiveness" to the domestic public, which is reflected in the increasing inability of governments to reconcile electoral and economic pressures on fiscal policy (Hübscher, Kemmerling, & T. Sattler, 2015;Hübscher, 2016). Simultaneously, independent central banks have increasingly come into the political spotlight.…”