The Electoral Effects of Fiscal Policies

With government debt at record levels following the 2008 financial crisis, policymakers in the European Union and its member states have debated the magnitude and speed by which governments should reduce budget deficits.  Yet remarkably little is known about the electoral effects of fiscal adjustments.  Several influential theories in economics and political science assume that voters reward incumbent governments for increasing deficits and punish incumbents for fiscal contractions (Rogoff 1990), particularly cuts to welfare programs (Pierson 1996).  In contrast, empirical research suggests that voters in developed countries tend to reelect governments that take discretionary measures to reduce the budget deficit (Brender and Drazen 2008).  In a sample of 306 election cycles in high-income democracies from 1961 to 2015, I show that Brender and Drazen’s conclusions fail to replicate.  To account for the possibility of reverse causality – that governments anticipating favorable electoral prospects are more likely to reduce election-year deficits – I use average international changes in the government deficit to instrument for domestic fiscal adjustments (Huebscher, Kemmerling, and Sattler 2014).  I find no significant relationship between election-term changes in government net lending and incumbent party vote share.  However, incumbent vote share decreases significantly with the election-year budget balance, and increases significantly with election-year changes in disbursements.  Voters also appear to reward governments for cutting welfare spending to fund other budgetary measures over the course of the election cycle.  Contrary to prevailing theories, I find that voters are more likely to sanction coalition and minority governments for election-year fiscal adjustments.