Austerity, Life Satisfaction and Expectations

This paper examines the linkages between fiscal austerity and life satisfaction across sixteen European countries using a sample of repeated cross-sections of individuals from 1983 to 2013 (N=853,482). Austerity is identified using changes in the cyclically-adjusted primary balance. Our dataset allows us to control for several individual-specific characteristics that are known to affect life satisfaction. In our empirical framework, we account for the role of macroeconomic developments and expectations. We find that austerity is inversely associated with life satisfaction, with the effect operating through an economic channel. Specifically, it is only the part of austerity correlated with macroeconomic developments, that is shown to empirically matter. Moreover, we show that the negative effect of austerity is mediated by expectations. Individuals with positive expectations about their future prospects are less affected, in terms of falling life satisfaction, by contractionary fiscal policies.