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Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2008

  • Jacopo Ponticelli
  • Hans-Joachim Voth

Does fiscal consolidation lead to social unrest? Using cross-country evidence for the period 1919 to 2008, we examine the extent to which societies become unstable after budget cuts. The results show a clear correlation between fiscal retrenchment and instability. Expenditure cuts are particularly potent in fueling protests; tax rises have only small and insignificant effects. We test if the relationship simply reflects economic downturns, using a recently-developed IMF dataset on exogenous expenditure shocks, and conclude that this is not the case. While autocracies and democracies show broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest after austerity measures. Growing media penetration does not strengthen the effect of cut-backs on the level of unrest. We also find that austerity episodes that result in unrest lead to quick reversals of fiscal policy.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 676.

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Date of creation: Oct 2012
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Handle: RePEc:bge:wpaper:676
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