Choosing the path of austerity: how parties and policy coalitions influence welfare state retrenchment in periods of fiscal consolidation

Klaus Armingeon,Kai Guthmann,David Weisstanner

doi:10.1080/01402382.2015.1111072

Abstract

What are the conditions under which some austerity programmes rely on substantial cuts to social spending? More specifically, do the partisan complexion and the type of government condition the extent to which austerity policies imply welfare state retrenchment? This article demonstrates that large budget consolidations tend to be associated with welfare state retrenchment. The findings support a partisan and a politico-institutionalist argument: (i) in periods of fiscal consolidation, welfare state retrenchment tends to be more pronounced under left-wing governments; (ii) since welfare state retrenchment is electorally and politically risky, it also tends to be more pronounced when pursued by a broad pro-reform coalition government. Therefore, the article shows that during budget consolidations implemented by left-wing broad coalition governments, welfare state retrenchment is greatest. Using long-run multipliers from autoregressive distributed lag models on 17 OECD countries during the 1982–2009 period, substantial support is found for these expectations.

Highlights

Since the 1980s, austerity has been the dominant topic in the debate on fiscal policies in democratic OECD-nations
What are the conditions under which some austerity programs rely on substantial cuts to social spending?
Models 1 through 4 estimate the effects based on all fiscal adjustment (FA) cases on changes in public social spending, while models 5 through 8 estimate those based only on large FA cases (FA size larger than 1.5% of GDP)

Summary

Introduction

Since the 1980s, austerity has been the dominant topic in the debate on fiscal policies in democratic OECD-nations. Austerity policies are aimed at fiscal consolidation either by cutting public expenditure or raising taxes. Both elements are implemented simultaneously with an emphasis on spending cuts that target several policy fields. Given its sheer size in public budgets, the welfare state can hardly be spared. What are the conditions under which some austerity programs rely on substantial cuts to social spending?. Left parties are viewed as trustworthy advocates of the welfare state that would not slash it for narrow ideological reasons, but instead, choose to remodel it in order to keep it sustainable in the long run Left-wing governments may be best able to reduce social spending in periods of fiscal consolidation

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Conclusion