Building on the simple models of social coalitions by Alesina (1988) and Alesina and Drazen (1991), I develop a two-step argument based on endogeneity and linkages. First I argue that that the power of social groups depends on past fiscal consolidations (success or failure) and how those cemented or undermined their power. Thus I tackle the issue of endogeneity overlooked in the literature: previous austerity episodes reshape the relationship between taxes and expenditures. Second, I show that the power of social groups and how it was changed by austerity episodes in the late 1970's, in the mid-1990's and since 2010 stems from their linkage to the budget (e.g. how the welfare state is financed - taxes or social security contributions) and between social groups.
I use a structured paired comparison of the UK and France from 1978 to 2014 holding partisan, institutional and economic factors constant to show under which conditions social coalitions push for expenditure or tax driven adjustments and under which conditions they tend to block them. The results have important implications for the legitimacy and feasibility of fiscal adjustments in the European Monetary Union.
