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Fiscal consolidations and electoral outcomes in emerging economies: Does the policy mix matter? Macro and micro level evidence from Latin America

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  • Ardanaz, Martín
  • Hallerberg, Mark
  • Scartascini, Carlos

Abstract

Do voters punish governments that introduce fiscal “austerity” measures? If so, does voter response vary according to the composition of fiscal adjustments? The empirical literature on the political economy of fiscal adjustments, which is mostly OECD-based, argues that consolidations do not have significant electoral consequences. In contrast, we find that voters punish fiscal consolidations at the polls in Latin America. To explain this result, we focus on the way fiscal adjustments episodes are implemented, both in terms of their design (taxes vs. spending) and timing. Such episodes rely fundamentally on increasing tax rates and bases of indirect taxes (such as the VAT) that hit broad segments of the population. Moreover, these policies are often implemented when politicians have no choice but to consolidate, that is, under severe economic circumstances. These macro results are corroborated with micro evidence from an original survey experiment that measures voter’s fiscal policy preferences over the business cycle in seven countries across Latin America. The experimental evidence shows that respondents prefer expenditure cuts to tax increases during downturns, which is the opposite of the type of consolidations that countries typically pursue.

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  • Ardanaz, Martín & Hallerberg, Mark & Scartascini, Carlos, 2020. "Fiscal consolidations and electoral outcomes in emerging economies: Does the policy mix matter? Macro and micro level evidence from Latin America," European Journal of Political Economy, Elsevier, vol. 64(C).
  • Handle: RePEc:eee:poleco:v:64:y:2020:i:c:s0176268020300665
    DOI: 10.1016/j.ejpoleco.2020.101918
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    More about this item

    Keywords

    Fiscal deficit; Taxes; Public expenditures; Business cycle; Elections;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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