Austerity and Elections

IMF Working Papers, April 30, 2021

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Reexamines the electoral consequences of fiscal austerity using action-based, real-time, ex-ante measures of fiscal austerity and a new database of changes in vote shares of incumbent parties.
Emphasizes the importance of the “how” (tax hikes versus expenditure cuts) and the “who” (left- versus right-leaning governments).
Main finding: tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political leaning of the government.
Quantitative headline: An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%.
Expenditure-based austerity:
- Detrimental for left-leaning governments.
- Beneficial for right-leaning governments.
The electoral cost of austerity—especially tax hikes—can be contained if it is implemented during good economic times.

Uses action-based, real-time, ex-ante measures of fiscal austerity rather than ex-post yearly measures used in most prior empirical studies.
Employs a new database of changes in vote shares of incumbent parties.
Focuses on disaggregation by fiscal instrument (tax increases versus expenditure cuts) and by government political leaning (left versus right).

Design of consolidation matters: whether consolidation is achieved through taxes or spending has markedly different electoral and political consequences.
Political constraints and timing matter: implementing tax-based consolidations during good economic times can reduce electoral backlash.
For policymakers, the interaction between instrument choice and political positioning (left/right) should inform the sequencing and composition of fiscal adjustment.