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From austerity to expansion? Consolidation, budget surpluses, and the decline of fiscal capacity

  • Haffert, Lukas
  • Mehrtens, Philip
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    In the wake of the financial crisis, most developed countries have entered a period of prolonged budgetary austerity. While the success of austerity programs is still unclear, it is also an open question what success would mean for activist government in the long run. This paper rejects the progressive belief that successful fiscal consolidation will lead to a strengthening of fiscal capacity, arguing that consolidations transform the political context in which fiscal policy is made. By analyzing the evolution of public expenditure in six countries with sustained budget surpluses, it shows that while surpluses were mostly achieved through expenditure cuts, they were predominantly used for cutting taxes. While fiscal crises abated, their collateral damage to public expenditure remained. This result is further elaborated by a case study of the Swedish budget surplus. The paper concludes that consolidations can create a specific type of fiscal regime and thus have long-term consequences for the fiscal capacity of the state.

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    Paper provided by Max Planck Institute for the Study of Societies in its series MPIfG Discussion Paper with number 13/16.

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    Date of creation: 2013
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    Handle: RePEc:zbw:mpifgd:1316
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    1. Alberto F. Alesina & Silvia Ardagna, 2012. "The design of fiscal adjustments," NBER Working Papers 18423, National Bureau of Economic Research, Inc.
    2. Agell, Jonas & Englund, Peter & Sodersten, Jan, 1996. "Tax Reform of the Century -- the Swedish Experiment," National Tax Journal, National Tax Association, vol. 49(4), pages 643-64, December.
    3. Roberto Perotti, 2011. "The "Austerity Myth": Gain Without Pain?," NBER Working Papers 17571, National Bureau of Economic Research, Inc.
    4. Alberto F. Alesina & Silvia Ardagna, 2009. "Large Changes in Fiscal Policy: Taxes Versus Spending," NBER Working Papers 15438, National Bureau of Economic Research, Inc.
    5. Adi Brender & Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, American Economic Association, vol. 98(5), pages 2203-20, December.
    6. Simon Wren-Lewis & Lars Calmfors, 2011. "What should fiscal councils do?," Economics Series Working Papers 537, University of Oxford, Department of Economics.
    7. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
    8. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
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