Fiscal Trade-Offs: Deficits, Austerity and the Macroeconomic Beliefs of Voters

Fiscal policy has been one the most contentious policy issues of the past decade. At the same time, the political incentive constraints (PIC) that governments face in their pursuit of deficit-spending or fiscal adjustment are still unknown. The literature generally assumes either that voters are fiscally conservatives and oppose fiscal deficits; or that they favor fiscal flexibility and punish governments for austerity. This paper, therefore, seeks to delineate the political constraints that governments face in fiscal policymaking by examining how voters assess the macroeconomic trade-off between fiscal deficits and austerity. Our analysis is based on a randomized experiment on a large sample in Germany, Spain and the United Kingdom. We estimate a voter response function that reflects to what extent higher levels of deficits lead to greater support for austerity. We also examine for what reasons voter support austerity (or not) and how voters distribute fiscal cuts across six possible spending categories.