Growth Models Under Austerity

Fiscal policy is an integral part of a country’s growth model. This chapter shows how governments subordinate their fiscal policy to the macroeconomic regime of their country: governments in export-led economies are two to three times more likely to pursue fiscal austerity than those in demand-led regimes. These rigid fiscal policies in many countries are not in line with voter attitudes and individual-level macroeconomic beliefs. Contrary to the economic ideas that provide the intellectual foundation of fiscal austerity, voters believe that these policies are detrimental to economic growth, but there is great variation between left and right voters. These ideological differences translate into distinct fiscal policies under left and right governments in balanced growth regimes, but not in unbalanced regimes. These results point to a mismatch between government policy, especially in export-led economies, and voter attitudes. This mismatch potentially contributes to the disillusionment of voters that has been observed in many countries.