Government Partisanship and Managing the Economy: Japan and Sweden in Comparative Perspective

It is generally taken for granted that countries governed by leftist governments expand social policies and have an affinity for active fiscal policy that implies higher tolerance of deficit‐ridden budgets. In contrast, conservative governments are taken to be less likely to favor welfare expansion, especially when it has negative fiscal consequences. We challenge this conventional wisdom by comparing the reactions of the Swedish and Japanese governments to economic crises during the 1990s. The puzzle is that the Social Democratic governments in Sweden were able to reduce ballooning budget deficits and thus bring the economy back into balance, while still having one of the largest public sectors in the developed world. In contrast, the conservative Liberal Democratic Party governments in Japan have been unable to redress their deficit problems despite having one of the smallest public sectors among the Organisation for Economic Co‐operation and Development countries. We argue that this can be explained by taking into consideration that governments’ tax and spending policies are influenced by bureaucratic structures and institutionally driven public beliefs. By comparing Japan and Sweden, we show how political parties actively seek to make their policy stances permanent by structuring taxation and expenditure policies to create institutionalized support for their policy preferences.     

Politischer Opportunismus und Haushaltsdefizite in den westdeutschen Bundesländern

This article analyzes fiscal political business cycles in the West-German Länder. By linking the theory of political business cycles with the insights of the theory of economic voting, I argue that the German Länder governments do not have an incentive to raise the budget deficit in order to signal economic competence to the electorate. Despite having an incentive to spend more before an election in order to provide public goods to the voters, governments cannot finance the supply of public goods with higher deficits because voters prefer healthy fiscal policies. An empirical analysis of the West-German Länder between 1970 and 2003 bolsters the theoretical claims. A government that expands the deficit before an election thus experiences a loss in voter support. Consequently, governments tend to reduce the budget deficit in pre-election years.     

Inflation,recession and the federal budget deficit (or,blaming economic problems on a statistical mirage)

Policy proposals to balance the budget and to limit government spending assume that budget deficits cause substantial harm, either increasing inflation or crowding out private borrowing from credit markets. These assertions have the support of policymakers across the breadth of the political spectrum, and dominate current political debate on macroeconomic policy. However, macroeconomic theory fails to provide a clearcut causal connection between budget deficits and larger economic problems such as inflation and recession. Thus, policies could be enacted that attack the symptoms instead of the causes of the deficit.We use the Granger causality test to find the causal relationships between budget deficits and inflation, GNP, and private investment respectively, for seventeen OECD countries for the period 1949–1981. Deficits do not cause changes in these variables; rather there is weak evidence that inflation and recession cause deficits. This implies that deficits are a symptom rather than a cause of inflation and reduced national output. So, if our goal is to reduce inflation and increase output, we should look to more direct policies than reducing deficits.An earlier version of this article was presented at the Annual Meeting of the American Society for Public Administration, New York, April 16–19, 1983.     

Independent central banks, regime type, and fiscal performance: the case of post-communist countries

This article analyzes the effect of central bank independence on fiscal deficits. Previous literature finds a negative relationship between bank independence and deficits in OECD countries. No such relationship is found for developing countries. We argue that independent and conservative central bankers prefer budget discipline due to the long run connection between deficits and inflation and can enforce their preference through interest rate hikes and refusal to lend to the government. The claim, however, is that the legislated independent status of the central bank is cheap talk in the absence of democratic institutions. We test empirically the conditional effect of central bank independence on a sample of 23 democratic and undemocratic post-communist countries from 1990 to 2002. Results show that independent central banks restrain budget deficits only in democracies. Also, democracies that have not granted independence to their central banks have the worst fiscal discipline.     

Executive Authority, the Personal Vote, and Budget Discipline in Latin American and Caribbean Countries

Recent scholarship on budgeting in Latin American and Caribbean (LAC) countries indicates that political institutions impact the level of budget discipline. Building upon this previous research, we argue that the principal problem that must be addressed in both the government and the legislature to insure strong fiscal discipline is the common pool resource (CPR) problem. At the cabinet level, the CPR problem arises because ministers consider the implications of decisions on their ministries only. The level of the CPR problem in the legislature depends upon the electoral system. Using a data set of LAC countries for the period 1988–97, we find that executive power in the budget process is most effective in reducing budget deficits when electoral incentives for the personal vote is high in the legislature, while strengthening the president (or prime minister) in countries where the personal vote is low in the legislature has no effect .     

Fighting with one hand tied behind the back: political budget cycles in the West German states

Theories of political budget cycles have been contested because scholars find that incumbents can manipulate deficits in the pre-election period only if fiscal transparency is low. I argue that these findings do not generally rule out the possibility of fiscal electioneering. Governments may increase spending on highly visible policies. The composition of the budget serves as a second-best strategy. It increases political support without straining the budget balance. An empirical analysis of the West German states reveals alternative electoral budget strategies and ultimately point to the importance of analyzing how governments choose between alternative fiscal instruments.     

The Politics and economics of revenue growth: A cross–national analysis

Despite considerable interest in comparative fiscal policy in general, and the high salience of tax policy and tax reform in the industrialized democracies, there are relatively few cross–national studies of the economic and political correlates of revenues over time. We undertake a cross–national time series study of revenue growth in fourteen OECD countries between 1958 and 1990.We test a number of political and economic hypotheses about revenue change, including political business cycle, 'fiscal illusion', elasticity, and ideological theories. For the 1958—1990 period, we find that all countries, regardless of revenue structure, experience higher real revenue growth as a result of inflation, but that revenue growth is more responsive to unemployment in countries that rely more on direct taxes compared to countries with less direct–tax reliance. We find that this effect is most pronounced in the post–1972 period. We also find that revenue tends to increase in the years following elections, consistent with the idea that governments try to minimize the political fallout from tax increases by separating them as much as possible from election campaign periods; this effect, too, is most pronounced in the post–1972 period. We find no support for 'fiscal illusion' and ideological theories of revenue growth.     

The politics and economics of revenue growth: A cross-national analysis

Abstract Despite considerable interest in comparative fiscal policy in general, and the high salience of tax policy and tax reform in the industrialized democracies, there are relatively few cross–national studies of the economic and political correlates of revenues over time. We undertake a cross–national time series study of revenue growth in fourteen OECD countries between 1958 and 1990.We test a number of political and economic hypotheses about revenue change, including political business cycle, 'fiscal illusion', elasticity, and ideological theories. For the 1958—1990 period, we find that all countries, regardless of revenue structure, experience higher real revenue growth as a result of inflation, but that revenue growth is more responsive to unemployment in countries that rely more on direct taxes compared to countries with less direct–tax reliance. We find that this effect is most pronounced in the post–1972 period. We also find that revenue tends to increase in the years following elections, consistent with the idea that governments try to minimize the political fallout from tax increases by separating them as much as possible from election campaign periods; this effect, too, is most pronounced in the post–1972 period. We find no support for 'fiscal illusion' and ideological theories of revenue growth.     

Economic performance of 'weak' governments and their interaction with central banks and labour: Deficits, economic growth, unemployment and inflation, 1961–1998

Abstract.   Comparative political economists have conventionally claimed that the strength and stability of governments affect policy making and performance, and that what they call 'weak governments'– multiparty, minority and short-lived governments – show poorer economic performance. This article tests this and related hypotheses on deficits, economic growth, unemployment and inflation by examining data from 17 OECD countries. I find that there is generally little evidence to indicate that so-called 'weak governments', when considered independently, produce poorer performance than strong ones. However, the effects of different government types are partly contingent on central bank independence and labour organization. When central banks are independent, coalition governments exhibit better inflation and economic growth performance than one-party governments, but the opposite happens when central banks are dependent. I attempt an explanation for these relationships. I also find that independent central banks, under certain conditions, lead to lower growth and higher inflation. Thus, some of the benefits of central bank independence are context-specific, depending on other political-economic factors.     

Fragmented Government Effects on Fiscal Policy: New Evidence

Using a panel of 22 OECD countries over the 1971–1996period, this paper extends previous literature on the effectsof fragmented government on fiscal policy outcomes in variousdirections. First, we focus on data relating to centralgovernment as alltheories refer to central government. Second, we also examinegovernment's position vis-à-vis parliament andgovernment's political fragmentation. We find evidence thatmore fragmented governmentshave higher deficits, while governments that have a largemajority in parliament have lower deficits. Right-winggovernments appear to have been fiscally more responsible inthe seventies. Political fragmentation does not affect agovernment's budget deficit.     

Do Balanced Budget Laws Matter in Recessions?

Since the mid‐1990s, most Canadian provinces have enacted balanced budget laws (BBLs). Critics argue that these laws are empty political gestures that are ignored during economic slowdowns. We consider BBLs in the Canadian provinces from 1981 to 2013 and find that provinces with stronger rules had better deficit and debt records overall. Recessions make it more difficult to achieve positive outcomes, but we find no obvious difference between the effects of BBLs during normal economic conditions and “bad times.” We conclude with suggestions for how the design of BBLs could take better account of jurisdiction‐specific business cycles.     

Budget Deficits and Coalition Governments

This paper shows that compromise between different ideologicalmotivations within multiparty governments may result in a biastoward running budget deficits even if all parties in thecoalition prefer balanced budgets. The deficit bias increases withthe degree of ``polarization'' of the ideological motivations andgenerally decreases with the degree of concentration of powerwithin the government. Although the analysis is conducted assuminga proportional representation electoral system, the results willalso apply to majoritarian systems if the winning party comprisesideologically different constituencies. The relationship betweenbudget deficits and multiparty governments is investigated usingdata from a sample of eight European Union countries for the period1971–1990. Analysis on pooled data is partly in line with the theory.Time series within country analysis is less favorable: we findclear support to the theory only in the case of Italy.     

Economic Conditions and State and Local Education Revenue

This article uses information on state and local education spending from 1989–1990 through 2005–2006 to examine the impact of economic conditions on the pattern of real revenue per student. We find that typical economic and other observable education demand determinants are significant in explaining the pattern of real revenue per student before and after the 2001 recession. We also find that there is no economically significant change in how governments responded to economic conditions after the 2001 recession. Finally, our results provide strong evidence that local governments attempted to offset state declines in revenues by increases in local revenues.     

On the political economy of national tax revenue forecasts: evidence from OECD countries

Sustainable budgets are important quality signals for the electorate. Politicians might thus have an incentive to influence tax revenue forecasts, which are widely regarded as a key element of national budget plans. Looking at the time period from 1996 to 2012, we systematically analyze whether national tax revenue forecasts in 18 OECD countries are biased due to political manipulation. Drawing on theories from the field of political economy, we test three hypotheses using panel estimation techniques. We find support for partisan politics. Left-wing governments seem to produce more optimistic, or less pessimistic, tax revenue forecasts than do right-wing ones. Contrary to the theoretical prediction based on the “common pool” problem, we find that more fragmented governments and parliaments tend to produce more pessimistic, or less optimistic, tax revenue forecasts. We find no empirical evidence that political business cycles play a role in tax revenue forecasts.     

Private sector shrinkage and the growth of industrialized economies: Reply

Further tests and thoughts on the OECD data lead me to conclude that, if anything, my 1986 paper underestimated the magnitude of the inverse relation between economic growth and government size. If one takes the nominal-based measure of government scale, as advised by Saunders, the significance levels, coefficient magnitudes and goodness of fits improve over what I found with my initial investigation. I would suggest that Saunders reconsider his reluctance to believe that the size of the public sector is unrelated to economic growth in OECD countries over this time period.One additional thought appears relevant to the current policy debate concerning budget deficits and economic performance within the major industrialized economies. The empirical work displayed here and in my 1986 paper suggests serious problems associated with the various proposals urging governments to raise taxes and/or ease fiscal policy. Elsewhere, I have suggested that available empirical evidence implies that plans to increase taxes as a way out of budget deficits are plans that carry the potential for raising government spending and possibly future deficits as well. Coupled with the evidence presented here, we should also recognize the potential of tax increases to raise the level of government participation in a country and, accordingly, exert inverse influences on its future economic performance as well. As suggested in my 1986 paper, the empirical evidence may suggest the following irony: While political participants may crave larger and larger non-market resource allocations, their future ability to satisfy that craving may very well be severely constrained by the satisfaction of that same appetite.     

Deficits, Soft Budget Constraints and Bailouts: Budgeting after the Norwegian Hospital Reform

In the 1990s, the Norwegian hospital sector was characterized by soft budgetary constraints and increasing budget deficits. This was one of the main antecedents of the 2002 hospital reform, where the central state took over ownership of the hospitals from the counties. Arguably, the centralization of ownership, financing and production would harden the budget constraints and increase the budgetary discipline. This analysis shows that this has not been accomplished. Instead, the production has been far above what was planned, and the deficits higher than ever. Two stages of the post-reform budget processes are analyzed: first, the stage where the central state set the budgets and sends signals of budgetary rules (whether the state sends signals of soft or hard budget constraints), and second, how the central state handled deficits in the hospital sector as they emerged (whether the hospitals was bailed out or not). The conclusion is that the central state neither set a hard budget constraint nor managed to stay firm as deficits turned up. It is argued that three mechanisms explain the prevailing problems of managing the hospital sector: uncertainty of the hospitals' financial situation during the transition phase; minority governments; and specific features related to the organization of the budgetary process in parliament.     

Tax Structure Turbulence in OECD Countries

This paper analyses whether and to what extent politiciansmanipulate tax structures strategically in order to winelections or for ideological purposes. We introduce anindicator for tax structure turbulence which measures thedegree to which a country's tax structure changes from oneyear to another. Using data on 18 OECD countries over theperiod 1965–1995, we find clear evidence of a politicalbudget cycle in national tax structures. More precisely, wefind that in election years, tax structures are changedsignificantly less than in other years. Further, thedispersion of political power significantly lowers the abilityof governments to change the tax structure. We do not,however, find any evidence of partisan budget cycles innational tax systems following political regime changes.     

Political budget cycles and media freedom

This paper examines the effects of elections on the conduct of central governments' fiscal policies. To do so, it uses a unique panel database that includes disaggregated spending and revenue series at the central government level for multiple countries over the 1975–2010 period. Examining political environments under which incumbent governments generate political budget cycles (PBCs), and comparing the relative importance of factors influencing cycles, we identify media freedom as the factor that plays the most critical role. This result provides a micro-foundation for rational opportunistic models for PBCs that rely on asymmetry of information about politicians' competence, and also offers a way to relate different conditioning factors of PBCs, including fiscal transparency and the maturity of democracies. Further, we show that the election-year rise in budget deficits under low media freedom is primarily driven by an increase in the current, not capital, component of public expenditure.     

Compelled without direction: Compulsory voting and party system spreading

Much of the current literature on compulsory voting (CV) examines its effects by simulating complete turnout. We argue that these studies do not capture the full effects of CV, as there is something qualitatively different about compulsory voting rules as compared to only increasing turnout. Furthermore, CV and turnout have important, yet unexplored, interactive effects. To test this argument, we look at governments in 43 countries over the 1990–2006 period. Nine of these countries have some form of CV. We examine the effect of CV on the ideological position and range of governments, left party seat share, and the effective number of parties. We find that high turnout in the presence of CV laws spreads out the distribution of voters and leads to an increase in the effective number of parliamentary parties and a larger ideological range of governments. These results have important implications for how we study CV and its consequences for party strategy.     

The politics of economic adjustment policy in Argentina,Brazil, and Mexico: Experiences in the 1980s and challenges for the future

During the debt crisis of the 1980s, new democratic governments in Argentina and Brazil experimented with heterodox approaches to economic stabilization, whereas Mexico's dominant party regime adopted a far more orthodox line of adjustment. None of these approaches had led to a sustained recovery by the end of the decade. Difference in policy choices are attributable to goals and beliefs of top decisionmaking officials and to the way the institutional features of their respective political regimes structured time horizons and vulnerability to domestic distributive pressures. Converging economic outcomes are attributable to underlying structural problems that cut across these distinctions: political constraints on the management of fiscal deficits, and international power asymmetries impeding significant reductions in the external debt burden.