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Title: The political consequences of austerity: how incumbents (and future generations) lose from austerity

Speaker: Olivier Jacques, Skelton-Clark Post-Doctoral Fellow

Abstract: What policies do governments prioritize when they implement austerity? What are the political consequences of austerity? Many scholars in the political economy suggest that governments can implement austerity with impunity and that fiscal consolidations can help to reorient public expenditures toward productive investments. In contrast, I argue that governments choose the path of least resistance when they engage in fiscal consolidations. When governments implement austerity packages, they tend to prioritize policies benefiting large and influential constituencies and those offering short-term benefits, while cutting back on long-term investments. Using a compositional dependent variable analysis in 17 OECD countries from 1980 to 2014, I show that austerity, measured with the narrative approach to fiscal consolidations, is associated with a decrease in the proportion of public investment in research and development and gross fixed capital formation and an increase in health care and pensions’ proportion of budgets. Thus, austerity is detrimental to intergenerational equity as it leads to a decline of long-term investments. Regarding the political consequences of austerity, I show that spending cuts decrease government approval, especially during economic downturns, but tax increases’ impact on approval remains minimal. Finally, left- and right-wing governments are equally likely to lose approval after implementing austerity.