Fiscal Austerity and Political Leaders’ Occupational Background

• In Event: Foreign Policy & Comparative Politics in Advanced Industrial Societies & Ideas, Knowledge and Politics Virtual Poster Session
  In Virtual Poster Session: Comparative Politics: Advanced Industrial Societies Virtual Poster Session

Abstract

What explains the variation in countries’ propensity to engage in austerity policy? What factors affect the type of fiscal consolidation policy to be implemented? While economic conditions are clearly paramount, political factors have been shown to play a role. Unfortunately, though, budget decisions are endogenous to the state of the economy, thus casting doubts on the validity of any inference based on the deficit-to-GDP ratio as well as other measures commonly used in the literature. Moreover, most studies have focused on institutional and ideological factors, which cannot explain the variation within similar institutional regimes and ideological families. This paper aims to fill the gap in two ways. First, I turn to the individual level of analysis and argue that political leaders’ occupational experience is an important, albeit often overlooked, factor that affects the way governments approach fiscal policy. Drawing from the literature in psychology, political science and business studies, I identify several possible mechanisms through which decision-makers’ previous experience in business activities may affect the likelihood, the type, and the timing of austerity policy. In particular, due to professional socialization as well as material interest considerations, I suggest that leaders with business experience may be more likely to engage in budget balancing fiscal consolidation, to stress expenditure-based (budget cuts) measures rather than tax-based (tax hikes) measures, and to propose longer multi-year plans. Second, I ease endogeneity concerns by leveraging a dataset of fiscal consolidation measures identified through the “narrative approach” pioneered by Romer and Romer (1989) in the context of monetary policy and recently developed in the context of fiscal policy by empirical macroeconomists (e.g. Alesina et al., 2019). The dataset identifies policy changes that are solely motivated by concerns about the state of public finance, thus excluding the episodes of fiscal consolidation that are endogenous to the state of the economic cycle. I empirically test the relationship between political leaders with business background and fiscal consolidation policy utilizing a panel dataset of 16 OECD countries from 1978 to 2014. The effect is robust to alternative specifications as well as to the use of panel matching estimators. The size of the effect is substantively similar to that of well-known political factors, such as the level of government fractionalization.

Author

• Nicola Nones, University of Virginia