The Political Costs of Austerity

62 Pages Posted: 22 Jul 2022 Last revised: 7 Aug 2023

See all articles by Ricardo Duque Gabriel

Ricardo Duque Gabriel

Board of Governors of the Federal Reserve System; National Bureau of Economic Research (NBER)

Mathias Klein

Sveriges Riksbank - Research Division

Ana Sofia Pessoa

University of Bonn - Department of Economics

Date Written: July 1, 2022

Abstract

Using a novel regional database covering over 200 elections in several European countries, this paper provides new empirical evidence on the political consequences of fiscal consolidations. To identify exogenous reductions in regional public spending, we use a Bartik-type instrument that combines regional sensitivities to changes in national government expenditures with narrative national consolidation episodes. Fiscal consolidations lead to a significant increase in extreme parties' vote share, lower voter turnout, and a rise in political fragmentation. We highlight the close relationship between detrimental economic developments and voters' support for extreme parties by showing that austerity induces severe economic costs through lowering GDP, employment, private investment, and wages. Austerity-driven recessions amplify the political costs of economic downturns considerably by increasing distrust in the political environment.

Keywords: Fiscal policy, Austerity, Voting behavior, Political economy

JEL Classification: D72, E62, H53

Suggested Citation

Gabriel, Ricardo Duque and Klein, Mathias and Pessoa, Ana Sofia, The Political Costs of Austerity (July 1, 2022). Available at SSRN: https://ssrn.com/abstract=4160971 or http://dx.doi.org/10.2139/ssrn.4160971

Ricardo Duque Gabriel (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.ricardoduquegabriel.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mathias Klein

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Ana Sofia Pessoa

University of Bonn - Department of Economics ( email )

Bonn
Germany

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