Academic journal article Romanian Journal of Political Science

Political Constraints and Discretionary Fiscal Policy during the Recent Economic Crisis

Academic journal article Romanian Journal of Political Science

Political Constraints and Discretionary Fiscal Policy during the Recent Economic Crisis

Article excerpt

Introduction

Many policies adopted by governments differ significantly between countries, despite no apparent justification in terms of "general will," social or economic context. In other words, while people may prefer similar solutions to similar problems, governments may end up having truly different policies to address them. This phenomenon is often understood as the result of the constraints faced by political actors in the process of policy formulation, adoption and implementation (Weir and Skocpol 1985). The explicit rules, crystallized and ossified in time, that stipulate how inputs from the body politic, are gathered and transformed into policy initiatives and laws differ greatly from one country to another. It is believed that these can influence structurally the capacity of governments to take action, irrespective of what that action may be. Convincing evidence from different levels of policy has been presented in the political economy literature (Persson and Tabellini 2003; Iversen and Soskice 2006). It has been argued that countries have chosen different solutions for healthcare provision, social policy or even energy markets, not so much because of different convictions or preferences of the electorate, but because of the way in which institutions changed the incentives for political behaviour (Immergut 1992; Milesi-Ferretti et al. 2002; Henisz and Zelner 2006).

The argument here will be for a similar effect of institutions when looking at the different approach of governments during the economic crisis of 2008. Faced with similar problems, a shortfall in economic output and rising unemployment, most governments chose fiscal policy to address them but with significant differences in terms of magnitude.

This could of course be explained simply by the different severity of the crisis or budget constraints. There could be many reasons why governments ended up having different responses to similar problems. However, it will be argued here that the institutional configuration of different countries may have played a role in shaping the policy outcomes. After all, institutions represent constraints to behaviour, and similar institutions may impose similar constraints (North 1991). The number, alignment and authority of political actors involved in the policy process contribute to the so called veto power which could reduce the decision making capacity. This may have prevented some governments from adopting an adequate fiscal package even in contexts when it would have been both economically viable and socially desirable.

The literature on discretionary fiscal spending has focused more on its consequences, being driven by the well-known disagreement over the size of the fiscal multiplier. Thus, when looking at the response to the crisis, most studies have centred on the effects, composition and duration of fiscal interventions, less so on why certain policies, sizes or scopes have been chosen over others (Aizenman and Jinjarak 2012; Khatiwada, 2009]. The few studies attempting to identify the determinants of fiscal stimulus relied entirely on economic indicators such as the output gap, automatic stabilizers or the fiscal space (Ahrens 2009; Horton and Ivanova 2009, Prasad and Sorkin 2009). What will be argued here is that further to the most intuitive explanations focusing on the economic context, there are also political and institutional mechanisms that systematically influence the decision to design the fiscal response to an economic contraction. Thus, the research question to be explored will be whether the political configuration operationalized as political constraints can explain in part the difference of magnitude between the fiscal stimulus policies chosen by different countries. In order to build an answer to this research question, the article will start with a brief introduction to institutional veto points and their interaction with political behaviour. This will be followed by an exposition of the different discretionary fiscal policy choices of governments around the world and the most plausible sources for this difference, including political constraints. …

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