Fiscal Austerity and the Decline of Liberal Democracy

This paper investigates the long-term effects of fiscal austerity on democratic institutions. While previous studies have established a link between economic crises, fiscal consolidations, and short-term electoral outcomes, our analysis extends this discussion by examining how austerity-induced economic insecurity undermines key dimensions of democracy over time. Using a comprehensive dataset of narrative fiscal shocks across 17 OECD economies (1978–2020) and 14 Latin American and Caribbean economies (1989–2020), we employ a semi-parametric estimation method to identify the causal impact of fiscal austerity on democratic backsliding. Our findings indicate that contractionary fiscal policies weaken institutional checks, reduce freedom of expression, and erode electoral integrity. These effects persist beyond immediate electoral cycles, leading to broader democratic erosion. The study highlights the importance of policy choices in shaping political institutions and suggests that alternative macroeconomic strategies, such as countercyclical fiscal policies and targeted social protection, may help mitigate the risks associated with austerity while preserving democratic governance.