Fiscal Consolidation under Electoral Risk

When do governments implement fiscal consolidation measures? Since such policies are unpopular, governments with low levels of electoral support should be hesitant to put them forward. They can, however, strategically time these measures at the beginning of the legislative term to minimize electoral punishment. In contrast, governments with high levels of electoral support face lower electoral risks and can afford to bank on the possibility that the fiscal situation improves exogenously. Fiscal consolidation therefore should be less influenced by the electoral cycle for these governments. Our empirical results show that the probability of consolidation decreases from 70% after an election to 20% towards the end of the legislative term when the government’s margin of victory is small. When margin is large, the probability of consolidation is roughly stable at around 60%. These results raise questions about previous conclusions that fiscal retrenchment does not involve much electoral risk.