Fiscal Stimulus Package

Over the past twenty-five years, governments across the advanced industrialized democracies have understood fiscal discipline to be the main macroeconomic problem to be solved. Pontusson and Raess (2015, p. 1) note that “political economists seem to have become convinced that governments are no longer willing or able to respond to economic downturns by engaging in fiscal stimulus”. This paper examines a brief, but important, deviation from this trend: the discretionary fiscal stimulus efforts enacted from late 2008 to early 2010.

In November of 2008, as the magnitude of the banking system’s meltdown were felt across the world, the G20 encouraged its members to engage in discretionary spending and tax cutting to limit the social consequences of the economic downturn. The EU proposed a 200 billion euro fiscal stimulus package later that month and, since the EU lacks substantial fiscal capacity, directed the Member States to contribute 85 per cent of the total cost and design the precise contents (Cameron, 2012).

The US followed in January of 2009, with a fiscal stimulus package of nearly 800 billion dollars in tax cuts and spending increases, and Canada and other countries followed close behind. By the end of 2010, the sovereign debt crisis had created a wide-ranging concern with fiscal austerity, which has remained the order of the day since then. The discretionary stimulus measures among OECD countries during this period yield an opportunity to examine the determinants of discretionary fiscal expansion under circumstances quite different from the renewed commitment to fiscal austerity that has been so influential since 2010.

Our purpose is to test the varieties of capitalism framework (VoC hereafter) for its predictive power in understanding discretionary fiscal policy in the advanced industrialized democracies in this unusual circumstance. Some scholars have theorized about the relationship between different models of capitalism and fiscal policy (Soskice, 2007; Iversen & Soskice, 2006), and others have tested their models with time series cross-sectional data from 1980 to 2009—the period of neoliberal ascendance (Amable & Azizi, 2014). But can VoC explain the extent of discretionary fiscal stimulus in the wake of a crisis that shook the foundations of this ascendance? I show that it can. Regression analysis confirms that regimes characterized by political economic coordination enacted smaller stimuli than less coordinated regimes. This suggests that, in spite of some statements to the contrary (e.g., Bermeo & Pontusson, 2012; Pontusson & Raess, 2012a), VoC does have some explanatory power in understanding the magnitude of fiscal policy response to crisis