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Estimating Government Discretion in Fiscal Policy

Slava Mikhaylov, London School of Economics, Institute for International Integration Studies, Trinity College Dublin
Alexander Herzog, New York University

IIIS Discussion Paper No. 339


Varieties of Capitalism (VoC) is a relatively new approach to describe macroeconomic differences across countries, classifying them into coordinated market economies (CMEs) and liberal market economies (LMEs). VoC already had a significant impact on the field but has been criticised for its lack of linkage to political systems. Recent studies focused on the similarities between CMEs and the Lijphartian consensus political systems, and LMEs and majoritarian political systems. One of the practical consequences of this classification is that governments in LMEs should enjoy more discretion over fiscal policy while governments in CMEs are more constrained in their decisions. In this paper we evaluate this proposition in two LME states -- Ireland and the UK -- where the latter is an example of a pure majoritarian state while the former bares several institutional characteristics of the consensus state (e.g. electoral system and coalition governments). We show that governments in both states enjoy relatively high degrees of discretion over fiscal policy, but that in Ireland policy outcomes are more well balanced in respect to interests represented by social partners. We thus provide empirical evidence that supports the classification proposed in the VoC approach. However, we also demonstrate that the context of decision-making has a crucial impact on the discretionary power of government, and that such context effects can change over time, even within the same system type.

Keywords : fiscal policy, computerised text analysis, EU Structural Funds, budgetary processp
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Last updated 28 August 2014 by IIIS (Email).