The politics of fiscal policy during economic downturns, 1981-2010

This article investigates fiscal policy responses to the Great Recession in historical perspective. We explore general trends in the frequency, size and composition of fiscal stimulus as well as the impact of government partisanship on fiscal policy outputs during the four international recessions of 1980-81, 1990-91, 2001-02 and 2008-09. Encompassing 17-23 OECD countries, our analysis calls into question the idea of a general retreat from fiscal policy activism since the early 1980s. The propensity of governments to respond to economic downturns by engaging in fiscal stimulus has increased over time and we do not observe any secular trend in the size of stimulus measures. At the same time, OECD governments have relied more on tax cuts to stimulate demand in the two recessions of the 2000s than they did in the early 1980s or early 1990s. Regarding government partisanship, we do not find any significant direct partisan effects on either the size or the composition of fiscal stimulus for any of the four recession episodes. However, the size of the welfare state conditioned the impact of government partisanship in the two recessions of the 2000s, with Left-leaning governments distinctly more prone to engage in discretionary fiscal stimulus and/or spending increases in large welfare states, but not in small welfare states.