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

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.