From Austerity to Expansion? Consolidation, Budget Surpluses, and the Decline of Fiscal Capacity

• DOI: 10.1177/0032329214556276
• Published date: 01 March 2015
• Author: Philip Mehrtens,Lukas Haffert
• Date: 01 March 2015
• Subject Matter: Articles

Politics & Society

2015, Vol. 43(1) 119 –148

© 2014 SAGE Publications

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DOI: 10.1177/0032329214556276

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Article

From Austerity to Expansion?

Consolidation, Budget

Surpluses, and the Decline of

Fiscal Capacity

Lukas Haffert

European University Institute, Florence, Italy

Philip Mehrtens

Max Planck Institute for the Study of Societies, Cologne, Germany

Abstract

In the wake of the financial crisis, many developed countries have embarked upon

ambitious fiscal consolidation programs. 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 study rejects the progressive belief that successful

fiscal consolidation will strengthen fiscal capacity, arguing that consolidations

transform the political context in which fiscal policy is made. By analyzing public

expenditure in six countries with sustained budget surpluses, we show that surpluses

were mostly achieved through expenditure cuts but predominantly used for tax cuts.

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. We

conclude that consolidations can create a new fiscal regime and thus have long-term

consequences for the fiscal capacity of the state.

Keywords

austerity, budget surpluses, fiscal policy, public investment, Sweden

Corresponding Author:

Philip Mehrtens, Max Planck Institute for the Study of Societies, Paulstr. 3, 50676 Cologne, Germany.

Email: mehrtens@mpifg.de

556276PASXXX10.1177/0032329214556276Politics & SocietyHaffert and Mehrtens

research-article2014

120 Politics & Society 43(1)

Democracy is about making choices. When the political room for making choices

becomes smaller and smaller, this can thus pose a serious challenge to the democratic

polity. One of the main drivers behind such developments is fiscal stress.1 In this case,

the fiscal space2 for new policy initiatives is squeezed between downward pressure on

tax rates and upward pressure on social expenditure and other forms of mandatory

spending, in particular interest on government debt. The recent financial crisis mas-

sively exacerbated this trend in most developed economies.

Against this background, proponents of activist government pin their hopes for

overcoming the need for austerity on consolidating public budgets, as Donald Taylor

demonstrates:

Progressives have more at stake in developing a long-range balanced budget than do

Conservatives precisely because we believe that government has a positive role to play in

modern life. If we do not develop a path to a sustainable federal budget, there will be no

room left for government to invest in new opportunities that could make people and our

country better off.3

Already in the 1990s, progressive political leaders all over the world, from Bill Clinton

in the United States to Göran Persson in Sweden, shared this belief. They suggested

that temporary austerity was necessary for rebalancing the budget and for returning to

a more activist fiscal policy afterward. We call this approach the progressive consoli-

dation view. In this view, consolidation is not an end in itself but a means to regain

fiscal capacity. The importance of such capacity is stressed by the “new growth the-

ory” in economics and by the concept of a “social investment welfare state” in political

science.4 Both literatures argue for increased public investment, hard and soft. This

raises the question of where the necessary resources for these investments are to come

from, given the precarious state of public finances. Here, the progressive consolidation

view seems to provide an answer.

In this article we argue that this strategy is unlikely to be successful. Sustainable

consolidation requires the creation of a new fiscal policy regime that remains effective

even after consolidation pressures have receded. Consolidation measures need to go

beyond technical adjustments to have enduring success. They have to be embedded in

a set of institutional, ideational, and political changes which together constitute a

break with the existing fiscal paradigm. These changes place a lasting and powerful

constraint on postconsolidation fiscal policy. A return to more fiscal policy discretion

would thus require another change of course, which is politically costly and unlikely

to happen endogenously.

To substantiate this claim, we analyze countries that ran budget surpluses for an

extended period of time and ask how they made use of these surpluses. We show that

these countries had additional fiscal room for maneuver but did not use this room for

wide-ranging new spending initiatives. In particular, those budget items that were

affected most during consolidation benefited least from surpluses. Instead, most gov-

ernments focused on cutting taxes and thus restricted the fiscal capacity of the state

even further.