Business politicians and fiscal consolidation

Abstract

AbstractWhat explains the variation in countries’ propensity to engage in austerity policy? Economic and political country-level factors are the paramount explanations in the literature. Nevertheless, variation in fiscal preferences at the executive level remains underexplored, except for ideology. Moreover, budget decisions are endogenous to the state of the economy, thus casting doubt on standard measures based on the debt and/or deficit ratio. This article contributes to the literature in two ways. First, I turn to the individual level of analysis and suggest that leaders with business experience are more likely to pursue a balanced budget and tend to implement fiscal consolidation policies based on spending cuts. Second, I ease concerns about individuals’ self-selection into office by relying on fiscal adjustments that are weakly orthogonal to the economic cycle. The statistical analysis of a panel of 17 OECD countries between 1978 and 2014 confirms the theoretical expectations. The results are robust to a variety of specification and statistical methodologies and hold for a subset of as-if random leadership transitions following close elections. A case study of Brian Mulroney's governments in Canada (1984–93) further illustrates the argument.