The Political Costs of Austerity

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.

Austerity and elections

“…For example, Fetzer (2019) documents a significant association between the exposure of an individual or area to the UK government's austerity-induced welfare reforms begun in 2010 and the subsequent rise in support for the UK Independence Party. Relatedly, Gabriel et al (2023) and Hübscher et al (2023) use our same austerity dataset and find that austerity packages lead to a significant increase in polarization and a decrease in turnout. Our paper differs from these contributions by (i) directly linking austerity to the electoral fortunes of the government implementing it, (ii) distinguishing between tax hikes and expenditures cuts, and (iii) highlighting that what matters for the electoral outcomes of austerity policies is whether the government deviated from what was promised in its manifesto.…”