Do fiscal rules dampen the political business cycle?

This paper develops and tests the theory that fiscal rules limit politicians' ability to manipulate the budget for electoral gain. Using panel data from the American states, I find evidence suggesting that stringent balanced budget rules dampen the political business cycle. That is, while spending rises before and falls after elections in states that can carry deficits into the next fiscal year, this pattern does not exist in states with strict “no-carry” rules. Neither binding gubernatorial term limits nor the partisan composition of government appear to significantly affect the magnitude of the political business cycle.     

Political budget cycles in the European Union and the impact of political pressures

This paper investigates the presence of political budget cycles (PBCs) in the European Union using data from all 27 member states over the period 1997?C2008, and explores their variability across countries and over time. Three basic results emerge: First, incumbent governments across the EU tend to engineer PBCs in order to enhance their re-election prospects. Second, PBCs are much larger and statistically more robust in the Eurozone countries than in the countries that have not yet adopted the euro. Third, the degree to which governments manipulate fiscal policy is negatively correlated with non-economic voting and positively correlated with electoral competitiveness.     

Conditional political budget cycles: a review of recent evidence

Until recently, most research on political budget cycles was based on the (often implicit) presumption that these cycles do not differ across countries. However, more recent studies focus on heterogeneity. This paper surveys studies examining the factors conditioning the occurrence and strength of manipulation of fiscal policy for electoral purposes, at the aggregate level or at the level of a particular type of government expenditure. Conditioning factors discussed include: the level of development, institutional quality, age and level of democracy, electoral rules and form of government, transparency of the political process, the presence of checks and balances, and fiscal rules.     

Separation of powers and political budget cycles

Political budget cycles (PBCs) arise when the electorate is imperfectly informed about the incumbent’s competence and the incumbent has discretion over the budget. Focusing on the second condition, we study how separation of powers affects PBCs in the composition of government spending. We find that the details of the budget process, namely, the bargaining rules, the status quo’s location, and the degree of compliance with the budget law, are critical for the existence and the amplitudes of PBCs. In particular, when the status quo is determined by the previous budget and there is high compliance with the budget law, separation of powers acts as a commitment device which solves the credibility problems that drive PBCs.     

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.     

Fiscal Institutions,Credit Ratings,and Borrowing Costs

This paper investigates the impact of fiscal institutions on state government borrowing costs. We find that institutions have both a direct and indirect effect on interest costs paid by state governments. Revenue limits are associated directly with higher interest costs; expenditure limits, stricter balanced budget rules, and restrictions on state debt issuance are indirectly associated with lower interest costs because they lead to higher credit ratings. It appears that investors and bond raters incorporate information on fiscal institutions into their assessment of state government credit quality.     

Fiscal Consolidation and Australia's Public Debt

Australia has experienced one of the fastest growing public debt levels in the world post‐Global Financial Crisis due to a series of large federal budget deficits driven by high government spending. In this paper we examine the balance sheet implications of this escalating public debt, before proposing some macro‐fiscal objectives for determining its sustainable level. These objectives are to (i) restore the federal government's solvency; (ii) eliminate foreign public debt; and (iii) achieve budgetary balance over the business cycle. Empirically, we first examine how much fiscal consolidation is required for debt stabilisation at current levels, before considering what sized budget balances are needed to achieve the target debt to GDP ratios consistent with the proposed objectives. The results show that no target debt to GDP level consistent with the optimal levels will be met on current fiscal settings in the medium term. This implies significantly greater fiscal consolidation is required to minimise future fiscal risk.     

Budget Transparency, Fiscal Performance, and Political Turnout: An International Approach

This paper attempts, for the first time, to assess the relationships between budget transparency, fiscal situation, and political turnout using a comparative international approach. With this aim, the authors build a comprehensive index of budget transparency encompassing 40 budget features based on international standards for a sample of 41 countries. They find a positive relationship between national government fiscal balance and budget transparency: The more information the budget discloses, the less the politicians can use fiscal deficits to achieve opportunistic goals. The univariate analysis shows a positive relationship between political turnout and transparency. This result gives some evidence of a positive answer to the question raised by James Alt and David Dreyer Lassen: Does transparency affect political outcomes such as turnout? To some extent, that the more transparent the budget reports are, the more incentives people have to vote. With respect to three variables—transparency, government fiscal balance, and electoral turnout—three clusters of countries arise: low transparency–fiscal imbalance, low transparency–small fiscal imbalance and high transparency–fiscal surplus.     

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 .     

A partisan model of government expenditure

Partisan models of budget politics largely concentrate on the size of government, budget deficits and debt, but most theories have little to say as to what the effect of party politics on both the size and the composition of budgets is. This paper seeks to extend previous literature in two directions. First, a model of spending preferences is developed that relates actors' preferred level and allocation of expenditure to electoral gains from fiscal policies. Second, changes in both total expenditure and the expenditure mix of two budget categories are analyzed for the effect of parties' spending preferences as stated in their election manifestos. Using data on 19 OECD countries from 1971 to 1999, the paper finds support for general partisan hypothesis. The results suggest that the actual spending preferences of parties matter whereas they do not indicate that parties of the left consistently differ from parties of the right in their spending behavior.     

Budget institutions and taxation

While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.     

Political budget cycles and election outcomes

This paper addresses two empirical questions. Is fiscal policy affected by upcoming elections? If so, do election-motivated fiscal policies enhance the probability of re-election of the incumbent? Employing data for 65 democratic countries over 1975–2005 in a semi-pooled panel model, we find that in most countries fiscal policy is hardly affected by elections. The countries for which we find a significant political budget cycle are very diverse. They include ‘young’ democracies but also ‘established’ democracies. In countries with a political budget cycle, election-motivated fiscal policies have a significant positive (but fairly small) effect on the electoral support for the political parties in government.     

The Political Budget Cycle and Subnational Debt Expenditures in Federations: Panel Data Evidence from India

What political variables explain variations in subnational fiscal expenditures on interest payments on the debt? The author argues that the political budget cycle and center‐right political party ideology—rather than the effective number of parties, alternation of power, ideological proximity between the central government and constituent units, or most forms of political party ideology—can help explain the level of expenditures on interest payment of subnational debt in India. The core empirical finding is that significant increases in expenditures on the debt occur the year in which a state assembly election is held in India.     

The Impact of Parties and Elections on Municipal Debt Policy in Mexico

Opportunistic electoral fiscal policy cycle theory suggests that all subnational officials will raise fiscal spending during elections. Ideological partisan fiscal policy cycle theory suggests that only left‐leaning governments will raise election year fiscal spending, with right‐leaning parties choosing the reverse. This article assesses which of these competing logics applies to debt policy choices. Cross‐sectional time‐series analysis of yearly loan acquisition across Mexican municipalities—on statistically matched municipal subsamples to balance creditworthiness across left‐ and right‐leaning governments—shows that all parties engage in electoral policy cycles but not in the way originally thought. It also shows that different parties favored different types of loans, although not always according to partisan predictions. Both electoral and partisan logics thus shape debt policy decisions—in contrast to fiscal policy where these logics are mutually exclusive—because debt policy involves decisions on multiple dimensions, about the total and type of loans.     

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.     

Two-round elections, one-round determinants? Evidence from the French municipal elections

Using a new database of French municipalities that covers 821 towns and two elections (2001 and 2008), we examine how the budget structure, degree of electoral competition and the economic context affect the share of votes for the incumbent. We take into account the institutional details of the two-round structure of the electoral process created by French electoral rules (dual ballot under plurality rules). We show that in the first round of the electoral process, spending on equipment (including infrastructures) can influence the voter, and that electoral competition has a strong impact on the incumbent’s score. In the second round, the incumbent’s vote is affected more by national considerations and local budget variables have no effect. We show that the dynamics between the first and the second rounds are intense. The results suggest that the determinants of each round’s outcome in a two-round electoral process are different.     

The Impact of Proportional Representation on Government Effectiveness: The New Zealand Experience

It is often claimed that proportional representation (PR) undermines government effectiveness, including decisional efficacy, fiscal prudence, electoral responsiveness and accountability. Drawing on New Zealand's experience since the introduction of a mixed-member proportional (MMP) electoral system in 1996, this article examines the impact of the new voting system on government effectiveness. Although government durability has been substantially reduced and the policy-making process has become more complex, governments under MMP appear to be no less able to address major policy problems or respond to changing economic circumstances. Moreover, New Zealand has maintained continuous fiscal surpluses under MMP — a radical departure from the protracted, and often large, deficits that characterised the previous two decades under a majoritarian electoral system.     

Austerity Regimes at the Local Level: Examining Fiscal Effects of Austerity Commissioners Using a Time-Series Synthetic Control Method

Abstract

From a democratic perspective, the replacement of government or parliament by a public manager to enforce budget discipline marks a serious intervention. Transferred to the local level, the replacement of the mayor and the council in three German municipalities by a state official (a so-called state commissioner) in recent years has raised questions about the legitimacy and adequacy of such a strong interventionist instrument. One crucial answer to be given to this legitimacy issue concerns effectiveness, in other words whether the instrument can fulfill its designated task by improving the local fiscal situation since the fiscal success of the commissioner is a basic prerequisite for legitimacy. By using a time-series approach of the synthetic control method (SCM) and constructing a synthetic comparison case to the town of Altena, an answer regarding the commissioner’s potential to reduce the short-term debt can be given. The commissioner was successful in limiting the debt increase and seems to have reversed the debt trend. This finding supports the effectiveness of rather hierarchical instruments for ensuring fiscal discipline at the local level and thereby adds to broadening the international public management literature on municipal takeovers.     

The Evolution of Budgetary Institutions in Estonia: A Path Full of Puzzles?

This article examines the evolution of budgetary institutions in Estonia between 1993 and 2008, with a main focus on rules governing the preparation, adoption, and implementation of the state budget. It discusses the initial choice of budgetary institutions in 1993 and subsequent developments in the light of theoretical propositions put forth by the fiscal governance literature. The case of Estonia poses a number of puzzles, and the article seeks to explain the institutional choices in Estonia: Why did the coalition government opt for a delegation mode of fiscal governance in 1993? Why has the preparation phase of the budget process evolved toward a contracts approach from 1994 onward, while the adoption phase has moved closer to a delegation mode? The article demonstrates that alongside government type, institutional choices can be influenced by lesson‐drawing from history, examples of other countries, and negative experiences gained in legislative budget process.     

Post-Keynesian Public Budgeting & Finance: Assessing Contributions From Modern Monetary Theory

While Modern Monetary Theory (MMT) offers contributions that are worthy of serious consideration, some additional theory-building and synthesis with existing theory may be in order to tie MMT into the established budgeting literature. MMT focuses primarily on monetarily sovereign governments. These are governments that face extremely “soft” budget constraints insofar as they: issue and regulate the value of their own currencies, possess central banks that function as the fiscal agents of their government treasuries, are able to issue sovereign debt denominated in their domestic currency, and operate in a system of freely-floating currency exchange rates, with a minimum of currency and capital controls. National governments that are sovereign according to these criteria are able to make all debt service payments as they come due, virtually without regard to their level of outstanding debt; they cannot be forced to default against their will. They are also macroeconomically-autonomous. It is the collective position of the symposium papers that these conditions describe, in precise terms, the fiscal position of the U.S. federal government. As such, the existence of an ultra-soft U.S. government budget constraint is grounded in the extremely favorable conditions of money and credit that the federal government is subject to, and which in fact it has created and nurtured for itself since the Second World War. An important implication is that the federal level budgeting literature cannot ignore the macroeconomics and the administration of a sovereign currency regime, nor the monetary economics that ungirds it, without sustaining charges of unrealism.