A reader has sent me a new Goldman Sachs Global Economics study by Ben Broadbent called “Fiscal tightening need not be electorally costly, but it will test government unity” (published May 13). It shows that spending cuts can actually be a good thing politically.
It is commonly assumed that cuts in government spending will be both economically painful and electorally costly. Neither is borne out in the data. We’ve written before about the limited (and sometimes positive) effects of spending cuts on economic growth, at least in open economies. Here we add some simple analysis on the electoral consequences and, like others, find no evidence that spending cuts reduce support for the incumbent government. If anything the opposite tends to be true.
However:
What is the case, however, is that coalition governments have been less successful at fiscal consolidation in the first place. It is encouraging the new UK government has stated that deficit reduction is its top priority, but in this regard it will find its purpose and unity severely tested in the months ahead.
I will post the link to the PDF if I find it.
Also, economist Donald Marron recently reported on nine countries that have slashed their spending by more than 10 points of GDP in the past:
According to an IMF study that I discussed a few months ago, the past three decades have witnessed at least nine instances in which developed nations have cut their structural deficits by at least 10% of GDP:
- Ireland (20%, 1978-89)
- Sweden (13%, 1993-2000)
- Finland (13%, 1993-2000)
- Sweden (13%, 1980-87)
- Denmark (12%, 1982-86)
- Greece (12%, 1989-95)
- Israel (11%, 1980-83)
- Belgium (11%, 1983-1998)
- Canada (10%, 1985-99)
Conclusion: If they did it, Greece and other countries can probably do it, too. But then Marron has another, more pessimistic post on the topic here.