Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2008

Abstract

Does fiscal consolidation lead to social unrest? Using cross-country evidence for the period 1919 to 2008, we examine the extent to which societies become unstable after budget cuts. We find a positive correlation between fiscal retrenchment and instability. Expenditure cuts are particularly potent in fueling protests; tax rises have only small effects. We test if the relationship simply reflects economic downturns, using cyclically adjusted fiscal variables and expenditure shocks from discretionary policy decisions, and conclude that this is not the case. The link between cut-backs and unrest only appears in democratic regimes. Peer-to-peer media penetration strengthens the effect.