The Electoral Effect of Large Fiscal Adjustments

by Veronique de Rugy

Cutting spending is often thought of as a sure way for lawmakers to lose their next election, but the data doesn’t seem to confirm this fear. A recent working paper by economists Alberto Alesina, Dorian Carloni, and Giampaolo Lecce called “The Electoral Consequences of Large Fiscal Adjustments” looks at this issue and finds “no evidence that governments which quickly reduce budget deficits are systematically voted out of office.”

The empirical evidence on this point is much less clear cut than the conviction with which this conventional wisdom is held. In the present paper, in fact, we find no evidence that governments which reduce budget deficits even decisively are systematically votedout of office. We also take into consideration as carefully as possible issues of reverse causality, namely the possibility that only “strong and popular” governments can implement fiscal adjustments and thus they are not voted out of office “despite” having reduced the deficits. Even taking this possibility into account we still find no evidence that fiscal adjustments, even decisive ones, systematically, on average, imply electoral defeats.

Their data is based on the ten largest (and successful) fiscal adjustments between 1975 and 2008 (you can find the list in Table 1 of their paper). They also looked at the nature of the fiscal adjustment, since the data also shows that packages made mainly of spending cuts rather than revenue increases were more effective at reducing the debt-to-GDP ratio. Here is what they find:

Table 1 shows that government changes occurred in 7 cases out of 19 terminations,thus they were about 37 percent of the total. But if we look at the five largest adjustments in cumulative size, the ratio decreases considerably, as changes in government occurred only in 1 case out of 10. On the contrary, there were about 40 percent of government changes over the total number of terminations from 1975 to 2008 for the countries sampled in the table, indicating that periods of large fiscal adjustments were not associated with systematically higher government turnover.

Secondly the table allows us to make some preliminary observations about the link between cabinet change and the composition of fiscal adjustments. Considering the percentage of the adjustment due to cut in expenditures, and comparing the five fiscal adjustments for which the value was highest with the remaining adjustments, we find that the cases in which the expenditure share of the adjustment was higher were associated with less frequent change in government.

In other words, they find that large fiscal-adjustment packages are nowhere near as bad politically as they are perceived to be. And in fact, fiscal adjustments that resulted in more actual spending cuts than revenue increases are good for elections. (Of course, the spending cuts actually have to materialize.)

Is it possible that these results are entirely driven by the popularity of the government implementing the adjustment? In other words, maybe only popular governments can cut spending without electoral risk. The paper finds that this is probably not the case. However, the authors acknowledge that this assumption is hard to test and so advise caution in using this conclusion:

The biggest counter argument is one of reverse causation, namely strong and popular government can implement fiscal adjustment and be reelected “despite” such policies, thus only these government do so. Our attempts to uncover these reverse causation does not provide convincing evidence that our result are only driven by this effect. Needless to say it is difficult to measure “strength” of a government, ex ante, and therefore our test should be taken cautiously. But we believe that a cautious conclusion is warranted: reasonably solid governments not on the verge of losing an election anyway can engage in fiscal adjustments, even aggressive ones and survive the next election.

The paper is here. I have written on this issue before here and here.

The Corner

The one and only.