Economic Shocks and Fiscal Policy Preferences: Evidence From COVID-19 in Spain

Abstract

Do negative economic shocks change fiscal policy preferences? We examine this question via the large COVID-19 shock, as the virus and ensuing lockdowns caused one of the largest acute economic contractions in recent history. While previous evidence that recessions meaningfully change fiscal preferences is limited, we hypothesize that the health pandemic should have had distinct effects. We argue that this is due to the large breadth, uncertainty, and socio-tropic basis of the economic contraction, and that worse economic evaluations and reduced economic optimism should correspond with greater support for fiscal interventions to address the crisis. To test these hypotheses, we use new panel evidence from Spain, a hard-hit country, surveying individuals prior to the pandemic and the same individuals during the pandemic. We find that individuals became more economically pessimistic across many measures. However, there is little evidence that this translates into support for more expansive fiscal policies. Second, we find through a framing experiment that this could be because individuals believe that the government’s fiscal policies would disproportionately benefit lower-income individuals. The findings indicate the theoretical importance of recessions for changing individual and socio-tropic economic expectations, but do not support the claim that large economic shocks can significantly change fiscal preferences.