Austerity for the Win? The Effect of Fiscal Consolidation on Political Support for the Government

This paper reexamines the dominant view that fiscal austerity has little adverse effects on governments' political support. It shows that previous studies underestimate the negative impact of fiscal consolidations on government support because they ignore the strategic behavior of the actors involved. In particular, we argue that voters can send signals to the government to which the government responds strategically. We find cases when voters send insincere signals punishing the government to make them stop consolidation. To address the empirical challenges that arise from this strategic behavior, we compile an original dataset of annual vote intentions and estimate the impact of fiscal consolidation on government political support using instrumental variables regressions. Our results show that fiscal austerity has a substantial negative effect on vote intentions for government parties. The electoral risk that is associated with fiscal consolidations, therefore, is substantially larger than proposed by previous studies. These findings raise doubts about the political foundations of the so-called `expansionary fiscal contractions' thesis, which is a main theoretical source of the current crisis resolution strategy in Europe.