Aid Cuts Increase Demand for Government Services and Taxation: Evidence from Halting USAID Funding 

Fiscal theories of state development emphasize a complementarity between government revenue, taxation, and citizen demands for public services. We assess the relevance of this logic for understanding the political and redistributive consequences of massive cuts to foreign aid budgets following the shuttering of USAID in 2025. We conduct over 4,500 in-person surveys, survey experiments, and interviews with citizens and public health officials before and after the termination of USAID operations in Malawi, one of the world's most aid-dependent countries. Focusing especially on health aid, we document three emerging trends. First, since the closing of USAID, citizens and public officials have observed substantial declines in health service quality, reduced medicine availability, and rising corruption, especially in more aid-dependent communities. Second, politicians and local service providers are often blamed for declining relations with donors and corresponding cuts to services. Third, we document high, but heterogeneous, demand for the government to fund canceled health services through taxation, particularly when respondents are experimentally assigned more information about aid cuts. Consistent with theory, we conclude that this aid shock is changing expectations of the state by increasing inequality and shifting demand for progressive and redistributive social policy, especially among the poorest.