DP18859 Austerity and Elections
This paper revisits the conventional but unproven wisdom that voters penalize governments for adopting fiscal austerity in a sample of advanced economies. We consider the composition of the austerity package and the economic manifesto of the implementing government and find that austerity packages consisting mostly of tax hikes have a significant electoral cost, which is larger for government parties that campaigned on a free-market manifesto. Conversely, expenditure-based austerity is costlier for government parties that did not run on a small-government platform, but may be beneficial for those that did. We show in a model that these results are an equilibrium outcome of the strategic interaction between polarized voters’ mobilizers and centrist politicians. These politicians may be either unwilling or temporarily forced not to fulfil their campaign promises. Mobilizers lack information about the politicians’ types and punish them whenever they observe a deviation to the centre.
