niamh hardiman niamh.hardiman@ucd.ie ucd school of politics and international relations ucd geary...

Niamh HardimanNiamh.Hardiman@ucd.ie

UCD School of Politics and International Relations

UCD Geary Institute

The politics of austerity budgets

Irish Economic Policy

Institute of Bankers, Dublin

1 February 2013

Outline

• ‘Policy requires politics’

• Dominant view

• Bringing politics back into explaining:– Initial policy choice– Composition of austerity– Distributive effects– Outcomes

Ireland and Spain

Collaboration with Sebastian Dellepiane

(Strathclyde)

Austerity budgets in EMU: the context

0 20 40 60 80 100 120 140 160

-35

-30

-25

-20

-15

-10

-5

0

5

Debt % GDP

Defi

cit

% G

DP

Change in debt and deficit, % GDP, 2007-2010. Eurostat

Conventional wisdom

• Object of interest:– 3% deficit target– GDP reference point

• How to do it:– Spending cuts

• Simultaneous

• Weak banks

• No growth

• The wrong option?

Yet ‘this time IS different’

7

The essential guide to fiscal consolidation…

…and the mystery of the missing ingredient

New questions

1. When and why undertake austerity?

2. What mix of spending cuts and revenue increases – and why?

3. What political and distributional effects of austerity?

4. What accounts for success or failure in outcomes?

So:

• What happened?

• How to explain budget policy choices?– Government partisanship/ party politics– Ideas– Interests/ veto players– Contextual constraints

1. Choice of fiscal response to crisis

The impact of fiscal packages between 2008 and 2010 on fiscal balances as a proportion of 2008 GDP

Typology of fiscal policy choice – why?

Type Focus Composition

Fiscal

response

Orthodox Contractionary Bias toward

spending cuts

12

Typology of fiscal policy choice – why?

Type Focus Composition

Fiscal

response

Orthodox Contractionary Bias toward

spending cuts

Heterodox Expansionary Active use of

revenue

13

Explaining initial policy divergence, 2008/9

14

Spa

in

Ir

el

an

d

Explaining Spain’s policy convergence, 2010

15

Spa

in Ir

el

an

d

Spain vs Ireland

Spain Ireland

Policy response

Initial fiscal conditions

Economic structure and interest coalitions

Partisanship

Dominant ideas

16

Spain vs Ireland

Spain Ireland

Policy response Early stimulus Early spending cuts and tax increases

Initial fiscal conditions

Economic structure and interest coalitions

Partisanship

Dominant ideas

17

Spain vs Ireland

Spain Ireland

Policy response Early stimulus Early spending cuts and tax increases

Initial fiscal conditions

Positive Positive

Economic structure and interest coalitions

Partisanship

Dominant ideas

18

Spain vs Ireland

Spain Ireland

Policy response Early stimulus Early spending cuts and tax increases

Initial fiscal conditions

Positive Positive

Economic structure and interest coalitions

Relatively closedLower-skill ManufactureConstruction collapsedTroubled cajas

Very open, trade and FDIHigh-tech Traded goods and servicesConstruction collapsed Ruined banks

Partisanship

Dominant ideas

19

Spain vs Ireland

Spain Ireland

Policy response Early stimulus Early spending cuts and tax increases

Initial fiscal conditions

Positive Positive

Economic structure and interest coalitions

Relatively closedLower-skill ManufactureConstruction collapsedTroubled cajas

Very open, trade and FDIHigh-tech Traded goods and servicesConstruction collapsed Ruined banks

Partisanship Social Democracy Right/ populist

Dominant ideas

20

Spain vs Ireland

Spain Ireland

Policy response Early stimulus Early spending cuts and tax increases

Initial fiscal conditions

Positive Positive

Economic structure and interest coalitions

Relatively closedLower-skill ManufactureConstruction collapsedTroubled cajas

Very open, trade and FDIHigh-tech Traded goods and servicesConstruction collapsed Ruined banks

Partisanship Social Democracy Right/ populist

Dominant ideas State-led supply side investment

Market-conforming competitiveness

21

Then: the failure of EU responses

22

http://www.spiegel.de/fotostrecke/fotostrecke-71636-2.html

Political choices, May 2010

• European and international context changed– Greece– Banks, sovereign debt

• Ireland: more of the same– And a loan programme

• Spain: Zapatero’s turn toward ‘orthodoxy’– ‘Markets’– PSOE: ‘We have lost the 2011 election on this day’

2. Contrasting consolidation strategies

Composition

Ireland 67% expenditure

33% revenue

Spain 40% spending

60% revenue

24

Ireland’s bias toward spending cuts

• Spending cuts: tax increases = 2:1

• €€ or people?

DPER database

DPER database

Revenue increases too

Spain – heavier reliance on taxes

2008 2009 2010

Taxes -7.2% -16.7% +8.1%

2010-11 2012

Taxes 1.7% GDP 2.2%

Spending -1.8% -1.7%

Why?

3. Distributive effects

• Ireland and Spain both:– Cut public sector pay and benefits– Increase taxes

• But – Contrasting government support bases – Different distributive effects

• Why?– ‘Politics matters’

• Partisanship• Vested interests• Credibility constraints

Ireland

• Off-limits:– Corporation tax– Income tax, SI– Public sector pay, welfare

• Adjustment through:– Reduced staff– Services – Quality

DPER database

Perspectives

Callan et al, ESRI QEC, 2012, p.49

Perspectives

Callan et al, ESRI QEC, 2012, p.49

Spain

PSOE, to Nov 2011

– Tax stimulus– Mixed adjustment, big

tax element– ‘Protect the most

vulnerable’ by protecting public sector

PP, Nov 2011+

– Mostly spending cuts• Health, education

– Business-friendly– Labour market issues– Regions

4. Does it work?

• Weaker macroeconomic conditions – Ex ante success, ex post failure

• Legitimation issues– Credibility – Public opinion

Which policy mix? What does it depend on?

Deficit reduction targets can be missed if:

Scale of fiscal effort, 2009-2012

General government underlying primary balancesOECD Economic Outlook, Volume 2012, Issue 2, 17 December 2012

Greece Iceland Ireland Spain Portugal Euro area United Kingdom

Germany0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Macroeconomic performance: Ireland

European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. European Economy

Occasional Papers 127, January 2013, p.54.

Macroeconomic performance: Ireland

European Commission. 2013. Economic

Adjustment Programme for Ireland: Autumn 2012

Review, January 2013. European Economy

Occasional Papers 127, January 2013, p.30.

Macroeconomic performance: Spain

FT 28 June 2012

Macroeconomic outlook

European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. European Economy

Occasional Papers 127, January 2013, p.44.

Ireland

Macroeconomic outlook

European Commission. 2013. Economic Adjustment Programme for Ireland: Autumn 2012 Review, January 2013. European Economy

Occasional Papers 127, January 2013, p.44.

Ireland

Spain

On Monday night, Olli Rehn, the EU's economic and monetary affairs commissioner, hinted that the austerity

programme may have to be relaxed…The Guardian, 29.1.2013

UnemploymentTotal, seasonally adjusted.

Eurostat.

Legitimacy: electoral consequences?

Eurobarometer

Eurobarometer

Eurobarometer

Conclusion: politics matters!

Thank you

Niamh.Hardiman@ucd.ie