Political budget cycles and election outcomes (original) (raw)

Estimating the Effect of Parliamentary Elections on Primary Budget Deficits in OECD Countries

2007

Using an unbalanced panel of 24 OECD countries for the period 1986-2005 the paper empirically tests the political budget cycle hypothesis. The econometric approach is based on the equation proposed by BOHN (1998) for testing the sustainability of fiscal policy and system GMM estimators. The empirical results strongly support the hypothesis of smaller primary surpluses (only) in election years. The result found by BRENDER and DRAZEN (2005) that an election effect exists only in new democracies is rejected. However, in contrast to the political budget cycle hypothesis, it is argued that the result may rather be explained by governments' attempt to avoid intra-governmental conflicts on limited budgetary funds during election years, since this may be interpreted as an adverse signal by the voters. Besides, the results indicate only a temporary effect of the European Monetary Union.

Political Implications of Fiscal Performance in OECD Countries

SSRN Electronic Journal, 2006

While economists argue that lower budget deficits are required in the developed countries, there is a widely held perception that expansionary fiscal policy helps incumbents to get reelected, an assumption that underlies the view that political budget cycles are widespread. However, this view has not been subject to much empirical testing. We examine this argument in a sample of developed countries over the period 1960-2003 and find that increased deficits during an incumbent's term in office, especially in election years, reduce the probability that a leader is reelected. The effects we find are not only statistically significant, but also quite substantial quantitatively. We also find that voters do not have a systematic preference for expenditure cuts relative to tax hikes or vice versa.

Electoral Fiscal Policy in New, Old, and Fragile Democracies

Comparative Economic Studies, 2007

We review research on political budget cycles across countries, including recent findings that they are a phenomenon of new democracies and are statistically insignificant in old, established democracies. We then consider what may account for this and review several hypotheses. Recent empirical work also finds that voters in new democracies do not reward election-year deficit spending, raising questions about explanations focusing on the use of election-year deficits to gain votes. This suggests that the increase in election-year expenditures and deficits in new democracies may reflect other motives. Specifically, it is suggested that they may reflect attempts to shore up a fragile democracy.

Elections, Fiscal Policy and Growth: Revisiting the Mechanism

SSRN Electronic Journal, 2002

This short paper reconsiders the popular result that the lower the probability of getting reelected, the stronger the incumbent politicians' incentive to follow shortsighted , inefficient policies. The setup is a general equilibrium model of endogenous growth and optimal fiscal policy, in which two political parties can alternate in power. We show that re-election uncertainty is not enough to produce the popular result. Specifically, re-election uncertainty must be combined with the hypothesis that politicians care about economic outcomes more when in power than when out of power, and-more importantly-that this preference over being in power is ad hoc. That is, if politicians can also choose how much to care about economic outcomes when in and out of power, it is optimal to care the same and hence shortsighted policies do not arise. Therefore, such policies presuppose a degree of irrationality on the part of political parties.

Electoral Confidence and Political Budget Cycles in Non-OECD Countries

There is a growing consensus in the literature that the occurrence of political budget cycles (PBCs) is highly conditional upon context. Most studies have focused on incumbents’ abilities to engage in pre-electoral fiscal manipulation while neglecting their incentives. This is particularly true for studies outside the Organization for Economic Cooperation and Development (OECD), which have attributed to incumbents a uniform and constant motivation to manipulate budgets in order to win elections. We argue that this is not the case. Using new data on state spending from 1960 to 2006 for 76 non-OECD countries, we show that PBCs primarily occur under conditions of uncertain electoral prospects. Thus, incentives to manipulate public spending prior to elections vary according to the incumbent’s electoral confidence. Given the particular context of non-OECD countries, we argue theoretically and show empirically that incumbents’ electoral confidence primarily depends on the tightness of past electoral results. Past political competition is thus a key driver of fiscal behavior in non-OECD countries.

How elections affect fiscal policy and growth: revisiting the mechanism

2003

This paper reconsiders the popular result that the lower is the probability of reelection, the greater is the incentive of incumbent politicians to choose short-sighted, inefficient policies. The set-up is a general equilibrium model of economic growth, in which fiscal policy is endogenously chosen under electoral uncertainty.

Essays in Political Economy: Budgets, Elections and Fiscal Policy

2010

This paper examines why fiscal policy is often procyclical. We introduce the concept of fiscal transparency into a model of retrospective voting, in which a political agency problem between voters and politicians generates a procyclical bias in government spending. The introduction of fiscal transparency generates two new predictions: 1) the procyclical bias in fiscal policy arises only in good times; and 2) a higher degree of fiscal transparency reduces the bias in good times. We find solid empirical support for both predictions using data on both OECD countries and a broader set of countries.

Political budget cycles in new versus established democracies

Journal of Monetary Economics, 2005

Like other recent studies, we find the existence of a political deficit cycle in a large cross-section of countries. However, we find that this result is driven by the experience of "new democracies". The strong budget cycle in those countries accounts for the finding of a budget cycle in larger samples that include these countries; when these countries are removed from the larger sample, so that only "established" democracies remain, the political budget cycle disappears. The political deficit cycle in new democracies accounts for findings in both developed and less developed economies, for the finding that the cycle is stronger in weaker democracies, and for differences in the political cycle across governmental and electoral systems. Our findings may reconcile two contradictory views of pre-electoral manipulation, one arguing it is a useful instrument to gain voter support and a widespread empirical phenomenon, the other arguing that voters punish rather than reward fiscal manipulation.

Fiscal management and political budget cycles in transition economies: Data panel analysis

2020

In this paper, on the basis of relevant statistical tests, the influence of the electoral process on the trajectory of fiscal indicators in the transition countries is analyzed. The aim of the research is to identify the political manipulation of certain fiscal policy mechanisms in transition countries.The focus of the survey is on the growth of general government spending, the reduction of general government revenues and the creation of budget deficits as the coherent consequences of fiscal expansion in the pre-election period. By testing, there is no relevant evidence of the use of tax incentives as a form of political action on the economic sphere. On the other hand, the results of the survey indicate that in the observed countries, there really is a rise in government spending in the period before the election process and, consequently, the growth of budget deficits. However, according to the same findings, in the post-election period there is no reduction in consumption. Growth...

Fiscal performance and elections in the context of a transition economy

Economic Systems, 2021

It is widely accepted that, in democratic societies, incumbent governments may use various means such as discretionary spending to increase their chances of re-election. In the context of potential budget constraints (e.g. large debt), the incumbent may consider alternative means. Tax revenue performance could be one such means prone to incumbents' electoral manipulations, particularly in the case of transition countries with a weak institutional framework. Investigating Albania, we show that fiscal performance, measured by monthly tax revenues, is poor before elections, especially in the case of elections that result in political rotation. Prior to "all elections" we observe a reduction in tax revenue growth ranging from 3.2 percentage points during the twelve months before elections to 4.0 percentage points during the six months before elections. This implies more than a halving of fiscal performance as compared to its long-term "natural" or average rate. Moreover, the deterioration in performance is considerably larger, double to triple, before "rotation elections". After elections, improved fiscal performance is observed. The key to reducing fiscal performance deterioration associated with elections is to establish rules and institutional supervision (independent or bipartisan) that reduce the discretion of tax authorities.