How to Design Politically Sustainable Responses to Fiscal Pressure

What are the best political and institutional responses in case of fiscal crisis?

Project Summary

How can the International Monetary Fund (IMF) help governments manage political challenges conjured by austerity measures? To answer this question, we have to know how voters feel about austerity measures and where they draw the line. The findings could help International Organizations like the IMF assist governments in finding better and more sustainable political solutions to debt crises, by keeping voters content.

The main research questions are:

  • How do voters respond to fiscal adjustments?
  • Can the IMF and the EU help stabilize governments during fiscal pressure?
  • Does a scapegoat strategy often used by national governments undermine the EU’s and the IMF’s  credibility amongst voters?

Based on a weighted voter response function (comprising aversion to personal income loss, provision of public goods and overall macroeconomic stability increase) the project tests two hypotheses; one, if voters oppose fiscal adjustments more, the greater the reduction in public goods provision and the greater the loss of personal income and second; two, if voters oppose adjustments less, the larger the fiscal deficit is.

Studies will be performed in five countries which have undergone similar fiscal adjustments, with different results in terms of political instability.

The aim of such an analysis is to help with the development of politically sustainable solutions in case of debt crises, bringing them in greater accordance with political accountability than the currently existing ones.

Academic Output

Executive Summary

The project investigated to what extent politically sustainable responses to fiscal pressure are possible. In order to do so, the project relied on survey experiments, complemented by macro level evidence and case specific narratives. The key findings confirm that austerity politics over the past decades significantly contributed to a further polarization of the political landscape with declining support for mainstream political parties and an increase in votes for parties to the right and the left of the political spectrum. We also find that the involvement of international organizations, such as the IMF, in combatting financial crises, can have a positive effect on the overall approval of austerity. This mitigating positive effect, however, comes at the costs of (temporary) loss of democratic control, which voters – on average – disapprove. Overall, the hope that the crisis can be resolved with the IMF dominates the dissatisfaction over the temporary lack of democratic accountability.

Working Paper

The Fiscal Policy Trap: Deficits, Austerity and Popularity

Existing research finds that voters disapprove of fiscal deficits and fiscal adjust- ments at the same time. Our analysis provides an explanation for these seemingly contradictory results. Since fiscal austerity has short-term costs and long-term ben- efits, voter discount the uncertain, future benefits of austerity and withdraw their support from the government after fiscal cuts. They only reward governments when the benefits of austerity policies become visible and the long-term benefits start to outweigh the short-term costs. In line with our expectations, a survey experiment in Australia, Germany and the USA shows that voters punish governments for fis- cal austerity, even if the fiscal deficit is large. The results from an observational study of annual vote intentions in 15 OECD countries confirm this. However, the dynamic panel model also shows that voters reward the government if the fiscal balance improves, but only gradually and with a delay. Electorally vulnerable governments, therefore, face a fiscal-policy dilemma that leaves them trapped between deficits and austerity because of the countervailing effects that these two variables have on vote intentions.

Working Paper

Does Austerity Cause Polarization?

In recent decades, governments in many Western democracies have shown a re- markable consensus in pursuing austerity during periods of strained public finances. In this paper, we show that these decisions have consequences for political polarization. Our macro-level analysis of 166 elections since 1980 finds that fiscal restraint increases both electoral abstention and votes for non-mainstream parties, thereby boosting party system polarization. A detailed analysis of selected fiscal adjustments also shows that new, small and radical parties benefit most from austerity policies. Finally, survey experiments with a total of 8,800 respondents in Germany, Portugal, Spain and the United Kingdom indicate that the effects of austerity on polarization are particularly pronounced when the mainstream right and left parties both stand for fiscal restraint. Austerity is a substantial cause of political polarization and hence political instability in industrialized democracies.

Working Paper

Voters and the IMF: Experimental Evidence From European Crisis Countries

How can governments convince voters to support an unpopular policy in times of crisis? One solution may be to turn towards an external actor, such as the IMF, in order to make crisis resolution more effective. At the same time, the involvement of the IMF undermines national sovereignty, which is seen critically by many voters. Our analysis uses an experimental approach to assess how voters evaluate the costs and benefits of such external interventions. The results from Portugal, Ireland, Greece and Spain show that – with the exception of Greece – approval of fiscal adjustment is higher with than without an IMF intervention. According to a causal mediation analysis, this is the case because voters expect that the crisis is more likely to be solved when the IMF intervenes. At the same time, voters are critical of the loss of democratic control if the IMF intervenes. Taken together, however, the hope that the crisis can be resolved with the IMF dominates the dissatisfaction over the lack of democratic accountability. Nonetheless, cross-country differences suggest that support for interventions critically hinges the ability of the IMF to deliver on the promise to resolve the crisis.

Research Team

Evelyne Hübscher
Coordinator
University of Geneva

Jan-Egbert Sturm
Co-Coordinator
Eidgenössische Technische Hochschule, Zurich

Thomas Sattler
Co-Coordinator
University of Geneva

Markus Wagner
Principal Member
University of Vienna

Status

completed

Disciplines

SDGs

Policy domains

Regions

Countries

Estonia, Greece, Ireland, Spain, United Kingdom

Host Institution

Coordinator

Year