Public Choice

, Volume 158, Issue 1–2, pp 209–220 | Cite as

Why do crises go to waste? Fiscal austerity and public service reform



In the tight budgetary conditions following the 2008 financial crisis, governments have proposed saving money by reforming public services. This paper argues that tight budget constraints make reform harder by introducing an information problem. Governments are uncertain about bureaucratic departments’ effectiveness. Normally, effective departments can be identified by increasing their budget, since they can use the increase to produce more than ineffective departments can. When budgets must be cut, however, ineffective departments can mimic effective ones by reducing their output. Budget cuts thus harm both short-run productive efficiency, and long-run allocative efficiency. I confirm these predictions in a US dataset. Low marginal productivity bureaucracies reduce output by more than expected in response to a budget cut, and budget setters respond less to observed short-run marginal productivity after cutback years.


Bureaucracy Reform Signaling 

JEL Classification

D73 H12 H61 



I thank Dennis Leech, Sharun Mukand, Roger Congleton and two anonymous reviewers and audiences at the EPCS, EPSA and ECPR 2011 meetings for their comments.


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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Centre for Competitive Advantage in the Global EconomyUniversity of WarwickCoventryUK

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