Fiscal Austerity and the Decline of Liberal Democracy

This paper investigates the long-term effects of fiscal austerity on democratic institutions.While previous studies have established a link between economic crises, fiscal consolidations,and short-term electoral outcomes, our analysis extends this discussion by examininghow austerity-induced economic insecurity undermines key dimensions of democracyover time. Using a comprehensive dataset of narrative fiscal shocks across 17 OECDeconomies (1978–2020) and 14 Latin American and Caribbean economies (1989–2020), weemploy a semi-parametric estimation method to identify the causal impact of fiscal austerityon democratic backsliding. Our findings indicate that contractionary fiscal policies weakeninstitutional checks, reduce freedom of expression, and erode electoral integrity. These effectspersist beyond immediate electoral cycles, leading to broader democratic erosion. Thestudy highlights the importance of policy choices in shaping political institutions and suggeststhat alternative macroeconomic strategies, such as countercyclical fiscal policies andtargeted social protection, may help mitigate the risks associated with austerity while preservingdemocratic governance.