The Political Economy of Fiscal Adjustments

Alberto Alesina
Roberto Perotti
José Tavares, Universidade Nova de Lisboa

Abstract

From the introduction: In this paper we reexamine the research on the economic effects of fiscal adjustments. Not all fiscal consolidations are contractionary: some are and some are not. In particular, we emphasize that the composition of the adjustment matters. We confirm and extend evidence that fiscal corrections relying mostly on spending cuts that are concentrated on government wages and transfers tend to be expansionary, while those relying mostly on tax increases are contractionary. The second and main purpose of the paper is to investigate whether governments that follow tight fiscal policies tend to be replaced in office, or more generally, whether they lose popularity as they cut deficits. The answer to both questions is a loud no. Using data drawn from a sample of nineteen countries in the OECD, we find no evidence of a systematic electoral penalty or fall in popularity for governments that follow restrained fiscal policies.