Fiscal Policy and the Financial Sector

Most analyses of fiscal policy conflict in comparative political economy start from a distributional perspective. In this view, struggles about fiscal policy are a conflict between capital and labor or the rich and the poor. More recent contributions have highlighted the potential for cross-class coalitions in fiscal policy based on shared sectoral interests. However, these analyses are mostly confined to the sectors of the “real economy”. This paper instead highlights the role of financial sector interests in fiscal policy. It argues that the financial sector has unique fiscal policy preferences which differ from those of manufacturing and of other services. Against this background, the paper explores how the growing role of private finance has shaped the development of tax policies across developed economies and how it has affected the use of fiscal policy for counter-cyclical purposes. More specifically, it argues that financialization has not only affected the redistribution- and insurance-functions of the welfare state, but also its stabilization function.