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Fiscal austerity and public investment: Is the possible the enemy of the necessary?

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  • Streeck, Wolfgang
  • Mertens, Daniel

Abstract

In most rich democracies one finds a tendency for the share in public finance that is available for discretionary spending to shrink. This is because tax revenues do not keep pace with simultaneous increases in fixed expenditures and growing pressures for fiscal consolidation. The present paper assesses the capacity of governments under conditions of fiscal austerity to shift financial resources within the shrinking share of discretionary expenditure from old to new purposes, and thereby fund future-oriented investment aimed at making societies more equitable and efficient. For this reason an indicator for soft public investment is developed, which includes public spending on education, R&D, family support, and active labor market policy. We present data for Germany, Sweden, and the United States for the years 1981 to 2007 in order to explore the general dynamics of consolidation policies under the expectation that far more ambitious consolidation attempts will be made in the coming decade. Our results suggest that the capacity of governments to shift resources towards soft public investment decreases as pressures for fiscal consolidation increase.

Suggested Citation

  • Streeck, Wolfgang & Mertens, Daniel, 2011. "Fiscal austerity and public investment: Is the possible the enemy of the necessary?," MPIfG Discussion Paper 11/12, Max Planck Institute for the Study of Societies.
    • Handle: RePEc:zbw:mpifgd:1112
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    1. Keman, Hans, 2010. "Cutting Back Public Investment after 1980: Collateral Damage, Policy Legacies and Political Adjustment," Journal of Public Policy, Cambridge University Press, vol. 30(2), pages 163-182, August.
    2. Jakob Haan & Jan Sturm & Bernd Sikken, 1996. "Government capital formation: Explaining the decline," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 132(1), pages 55-74, March.
    3. Richard Rose, 1990. "Inheritance Before Choice in Public policy," Journal of Theoretical Politics, , vol. 2(3), pages 263-291, July.
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    Cited by:

    1. Ross Beveridge & Philippe Koch, 2021. "Contesting austerity, de-centring the state: Anti-politics and the political horizon of the urban," Environment and Planning C, , vol. 39(3), pages 451-468, May.
    2. Haffert, Lukas & Mehrtens, Philip, 2013. "From austerity to expansion? Consolidation, budget surpluses, and the decline of fiscal capacity," MPIfG Discussion Paper 13/16, Max Planck Institute for the Study of Societies.
    3. Streeck, Wolfgang, 2013. "The politics of public debt: Neoliberalism, capitalist development, and the restructuring of the state," MPIfG Discussion Paper 13/7, Max Planck Institute for the Study of Societies.
    4. Gough, Ian, 2016. "Welfare states and environmental states: a comparative analysis," LSE Research Online Documents on Economics 63153, London School of Economics and Political Science, LSE Library.
    5. Jacques, Olivier & Noël, Alain, 2022. "The politics of public health investments," Social Science & Medicine, Elsevier, vol. 309(C).
    6. Oto Hudec & Ladislav SuhAnyi & NataSa UrbanèikovA, 2014. "Regional Decision-Making Criteria: Strategic Investment In The Central Europe," Theoretical and Empirical Researches in Urban Management, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 9(2), pages 104-117, May.
    7. Olivier Jacques & Alain Noel, 2022. "Austerity Reduces Public Health Investment," CIRANO Working Papers 2022s-02, CIRANO.
    8. Anton Hemerijck, 2016. "New EMU governance: Not (yet) ready for social investment?," Working Papers of the Vienna Institute for European integration research (EIF) 1, Institute for European integration research (EIF).
    9. Wolfgang Streeck, 2014. "The Politics of Public Debt: Neoliberalism, Capitalist Development and the Restructuring of the State," German Economic Review, Verein für Socialpolitik, vol. 15(1), pages 143-165, February.

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