Vote for agony
Dec 2nd 2010
From The Economist print edition
Cutting public spending and raising taxes may not be as politically suicidal as it seems
WINNING elections these days can seem like committing political suicide. Many in Britain—including, reportedly, the governor of the Bank of England—reckoned that the victors of the general election in May of this year would be out of power for a generation. All of the main parties, terrified of scaring the electorate, campaigned on the basis that they would tighten the budget only modestly, in the full knowledge that far nastier medicine would be required. Today, across the periphery of the euro zone, governments are struggling to placate financial markets while maintaining the confidence of their electorates.
The idea that imposing austerity is political hara-kiri is widely held. But a new paper* by Alberto Alesina of Harvard University, Dorian Carloni of the University of California at Berkeley and Giampaolo Lecce of New York University finds little historical support for it. “The empirical evidence on this point”, the economists write, “is much less clear cut than the conviction with which this conventional wisdom is held.”
The authors study 19 rich countries over the 33 years between 1975 and 2008, identifying instances in which governments cut the primary deficit (ie, before debt service), adjusted for the stage of the economic cycle, by at least 1.5% of GDP. This is the standard way in which economists measure periods of fiscal consolidation, though the IMF has argued recently that an alternative approach, which looks at countries’ stated policies, may be better.
The authors begin by picking out the ten harshest episodes of fiscal consolidation in OECD countries in that period. Many of the countries in the eye of the storm today—including Britain, Ireland, Italy and Portugal—are on this list, having been forced to implement severe fiscal consolidations before.
The paper then looks at what happened to incumbent governments that faced elections either during the period of fiscal tightening or within two years of its having come to a close. There were 19 such elections, of which seven (or 37%) resulted in a change of government. Tightening governments seem to have a survival rate no worse than the average: incumbents were booted out of office in 40% of all the elections in rich countries between 1975 and 2008.
Narrowing things down even further, to the five most painful episodes of belt-tightening, produces a similar result. And when the authors broaden their analysis to include all large fiscal consolidations (not just the biggest five or ten), their results are once again pretty much the same. In all, there were 60 instances in the 19 rich economies they study where a country cut its budget deficit by at least 1.5% of GDP. Again, the odds of the government losing power were about 40%.
If it is not political madness to try to balance the books, what is the best way to do it? The economists’ data permit them to assess what best saves politicians’ skins. They classify their ten episodes of fiscal austerity into those that relied primarily on tax increases and those that relied heavily on cuts in expenditure. Ireland between 1986 and 1989, Canada (1993-97), Finland (1993-98), Belgium (1982-87) and Sweden (1994-2000) all chopped rather than taxed.
In only 20% of elections in the countries that slashed spending did the government lose power, compared with a 56% rate of being booted out of office for governments which chose to raise taxes. Voters evidently dislike tax increases much more than they abhor spending cuts.
Do the popular cut, or are cuts popular?
One worry about interpreting these results is, however, that politically secure governments may be precisely the ones implementing such tough policies. But the economists were at least able also to assess the records of coalition governments, which might be assumed, by and large, to be in a weaker initial position than single-party governments.
Coalitions don’t seem to be much weaker: they last 4.12 years on average, compared with 4.2 years for single-party governments, although they do lose elections slightly more often. But they show no tendency to shy away from being fiscally firm. In the data that Messrs Alesina, Carloni and Lecce use, coalitions tightened the national belt in 9.9% of the years they were in office—about the same as single-party governments, which did so in 10.1% of years.
The results from a different measure of political strength—whether or not a government had an absolute majority in the legislature—are similar. And neither kind of supposedly strong government was more likely to survive at the polls within two years of a bout of budget-slashing. If anything, coalition governments and those without a clear majority were slightly more likely to survive an election after a tough fiscal consolidation.
The results of the paper suggest that cash-strapped governments ought not to worry about losing office as much as received wisdom might have it. There might be riots on the streets and strikes, but the electorate may take a grown-up view of fiscal consolidation, particularly if it is concentrated on spending cuts rather than tax increases.
Yet that in turn raises another question: why are politicians still so nervous about balancing the books? The authors suggest that a failure to tackle budget problems is far likelier when governments are beholden to interest groups, such as industries that benefit from tax breaks, or homeowners, or those on pensions, rather than the voting public at large. Confronting them, rather than the entire electorate, may be the really difficult task for governments that want to make the numbers add up.
* “The Electoral Consequences of Large Fiscal Adjustments”, by Alberto Alesina, Dorian Carloni and Giampaolo Lecce. Unpublished draft, October 2010. Available here.
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