Choosing the Path of Austerity: How Policy Coalitions Shape Welfare-policy Choices in Periods of Fiscal Consolidation

Abstract

This paper focuses on the effect of fiscal adjustment programs on public social expenditures. We show that budget consolidations are generally associated with welfare state retrenchment. But do the partisan complexion and the type of government condition the extent to which austerity policies rely on social spending cuts? These are the questions guiding our paper, which compares 17 OECD countries between 1982 and 2009. Our findings partly support a functionalist argument: If governments embark on austerity, their partisan complexion does not matter. Since welfare state retrenchment is electorally and politically risky, however, a broad pro-reform coalition is a crucial precondition for large fiscal consolidation programs to rely on substantial cuts to social security. We use a novel operationalization of fiscal consolidation based on budgetary decisions, rather than simply tracing deficits without consideration of the underlying policy changes. Our empirical results are based on long-run multipliers from autoregressive distributed lag models.