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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 Alesina & Silvia Ardagna, 2010. "Large Changes in Fiscal Policy: Taxes versus Spending," NBER Chapters, in: Tax Policy and the Economy, Volume 24, pages 35-68 National Bureau of Economic Research, Inc.
    2. Roberto Perotti, 2011. "The "Austerity Myth": Gain Without Pain?," NBER Working Papers 17571, National Bureau of Economic Research, Inc.
    3. 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.
    4. Calmfors, Lars & Wren-Lewis, Simon, 2010. "What Should Fiscal Councils Do?," Seminar Papers 768, Stockholm University, Institute for International Economic Studies.
    5. Agell, Jonas & Englund, Peter & Södersten, Jan, 1996. "Tax Reform of the Century - The Swedish Experiment," Working Paper Series 1996:13, Uppsala University, Department of Economics.
    6. Alberto Alesina & Silvia Ardagna, 2013. "The Design of Fiscal Adjustments," NBER Chapters, in: Tax Policy and the Economy, Volume 27, pages 19-67 National Bureau of Economic Research, Inc.
    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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