Do spending cuts harm governments’ re-election prospects?

Should David Cameron worry that restraining public spending will hurt his chances of being re-elected? Recent political history will reassure him.

In the 1980s and 1990s countries such as the UK, Canada, New Zealand, Sweden, and Ireland had governments that exercised fiscal restraint. In some cases they actually cut spending in real terms. Margaret Thatcher, Paul Martin, Sir Roger Douglas and their counterparts were faced with protests and strikes. They were also opposed by much of the media and academia. Just like we’ve recently seen in the papers, many commentators believed fiscal tightening would undermine economic recovery. Indeed, the policies of Mrs Thatcher and her chancellor Geoffrey Howe were heavily criticised by 364 economists. The leaders were all advised that they would lose the next election.

In each case the critics were proved wrong. The economy quickly improved and the ruling party was re-elected to government. Margaret Thatcher was Prime Minister from 1979 to 1990; the Canadian Liberal Party only left power in 2006. In most instances over the last three decades where decisive action has been taken to tackle budget deficits, it seems the party in power has been re-elected.

I think the best way for a government to act is, first, to get the cuts in early, which the Thatcher government did and Cameron appears to be doing, and second, to trust to luck. One can argue it wasn’t the economics that worked for Thatcher, but foreign affairs (the Falklands War) and politics (the miners’ strike). In all cases, the Thatcher government ended up on the right side and showed itself to be resolute. Cameron has to be ensure his government comes across the same.

The big danger for Cameron is that this slowdown will prove to be more persistent than the one in 1980/81 – in part because massive government intervention in various forms has hampered the economic adjustment process.

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