Do political variables affect fiscal policy adjustment decisions? New empirical evidence

We test eight hypotheses on political factors influencing the likelihood that a fiscal policy adjustment occurs. We employ a panel discrete choice model for 20 OECD countries for the period 1970–2003. Two different definitions of fiscal adjustments are used to capture the differences between rapid and gradual adjustments. We find that these types of fiscal adjustment are primarily driven by economic factors and are hardly affected by political variables. The likelihood that a rapid adjustment takes place is only influenced by upcoming elections, while the likelihood that a gradual adjustment takes place increases in case of broad policy reform.     

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.     

Treated politicians,treated voters: A natural experiment on political budget cycles

Although pre-electoral political manipulation of the budget — the political budget cycle (PBC) — has been long investigated by scholars, empirical findings are mixed at best. This is partly because of the non-random nature of election timing. There also exist ongoing debates over how the budget is manipulated for electoral purposes. We address these issues by exploiting a natural experiment in Japan, where the timing of both executive and legislative elections in municipalities is fixed, staggered, and as good as random, and by using the detailed items of the municipal budget. We find that total and capital expenditures follow the PBC, but tax revenue does not. We also find that executive elections are associated with the PBC, but legislative elections are not. Against the conventional wisdom that democratic or developed countries are free from the PBC, our case of Japan offers an intriguing exception.     

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 timing of elections in federations: a disciplining device against soft budget constraints?

We introduce political economics into the soft budget constraint problem by asking if the timing of elections has the potential to harden budget constraints. Specifically, we ask under which circumstances the soft budget constraint problem is worse—with synchronized elections, i.e. simultaneous central and regional office terms, or with staggered elections, i.e. terms of office that do not coincide. We find that staggered elections clearly improve fiscal discipline at the local level as well as welfare.     

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.     

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.     

When Mayors Matter: Estimating the Impact of Mayoral Partisanship on City Policy

U.S. cities are limited in their ability to set policy. Can these constraints mute the impact of mayors’ partisanship on policy outcomes? We hypothesize that mayoral partisanship will more strongly affect outcomes in policy areas where there is less shared authority between local, state, and federal governments. To test this hypothesis, we create a novel dataset combining U.S. mayoral election returns from 1990 to 2006 with city fiscal data. Using regression discontinuity design, we find that cities that elect a Democratic mayor spend a smaller share of their budget on public safety, a policy area where local discretion is high, than otherwise similar cities that elect a Republican or an Independent. We find no differences on tax policy, social policy, and other areas that are characterized by significant overlapping authority. These results suggest that models of national policymaking are only partially applicable to U.S. cities. They also have implications for political accountability: mayors may not be able to influence the full range of policies that are nominally local responsibilities.     

The Rise of the Far Right in Debtor and Creditor European Countries: The Case of European Parliament Elections

While the 2014 European Parliament elections were marked by the rise of parties on the far right‐wing, the different patterns of support that we observe across Europe and across time are not directly related to the economic crisis. Indeed, economic hardship seems neither sufficient nor necessary for the rise of such parties to occur. Using the cross‐national results for the 2004, 2009 and 2014 EP elections in order to capture time and country variations, we posit that the economy affects the rise of far right‐wing parties in more complex ways. Specifically, we compare the experience of high‐debt countries (the ‘debtors’) and the others (the ‘creditors’) and explore the relationship between far right‐wing party success on the one hand, and unemployment, inequality, immigration, globalisation and the welfare state on the other. Our discussion suggests there might be a trade‐off between budgetary stability and far right‐wing party support, but the choice between Charybdis and Scylla may be avoided if policy‐makers carefully choose which policies should bear the brunt of the fiscal adjustment.     

Fiscal Policy Cycles and Public Expenditure in Developing Countries

The paper studies empirically the fiscal policy instruments by which governments try to influence election outcomes in 24 developing countries for the 1973–1992 period. The study finds that the main vehicle for expansionary fiscal policies around elections is increasing public expenditure rather than lowering taxes, and public investment cycles seem particularly prominent. Institutional mechanisms which constrain discretionary expenditure policies and which strengthen fiscal control are therefore worthwhile considering to prevent opportunistic policy making around elections.     

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.     

Do elections affect the composition of fiscal policy in?developed, established democracies?

This paper investigates the impact of elections on the level and composition of fiscal instruments using a sample of 19 high-income OECD democracies during the period 1972–1999. We find that elections shift public spending towards current expenditures at the cost of public investment. Although we find no evidence for an electoral cycle for government deficit and overall expenditures, we find a negative effect of elections on revenue attributed to a fall in direct taxation. Our results apply for predetermined electoral periods while endogenous elections seem to increase deficit and leave the composition of fiscal policy unaffected.     

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.     

Explaining the immigration policy mix: Countries' relative openness to asylum and labour migration

Western democracies have developed complex policies to manage migration flows. Much of the scholarly literature and political discourse assume that countries have become increasingly selective and that they prioritise economic intakes. Despite clear efforts by policymakers to distinguish between refugees and migrant workers, we know surprisingly little about how countries combine different policy dimensions and which factors shape their relative openness to different target groups. In this article, we shed light on how countries combine two of the main admission channels, asylum and labour migration, by introducing the concept of the ‘immigration policy mix’. A comparative analysis of 33 OECD countries between 1980 and 2010 examines the pattern and drivers behind their immigration policy mix: Does the policy mix follow a pattern of convergence, is it subject to political dynamics or is it path dependent? The results reveal that despite a shift in political sympathies from asylum to labour migration, countries' immigration policy mixes have strongly converged into more liberal policies overall. The immigration policy mix primarily reflects governments’ limited room to manoeuvre due to competing political pressures. These insights demonstrate that the immigration policy mix serves to enhance our understanding of countries’ complex regulation of immigration.     

Political Cycles,Fiscal Deficits,and Output Spillovers in Europe

This paper investigates whether national elections in Europegenerate political cycles in other European countries, and, ifso, whether these spillover effects are likely to surviveinside EMU. The paper first tests whether elections in Germanyaffect macroeconomic outcomes in other European countries andthen investigates the impact of elections on budget deficits.The results indicate that German politics significantlyimpacts macroeconomic variables in other European countries,and also that politics significantly affects the behaviour ofEuropean budgetary policy. The prospect of elections tends toincrease public deficits in recessions, whereas left-winggovernments tend to be more deficit-prone than right-winggovernments regardless of the state of the economy. Moreover,the existence of political cycles spillovers among Europeancountries suggest that there may be a need for electoralcoordination.     

Oil,elections and fiscal transparency

How does governments’ ability to gain financing from oil income affect their behaviour? Numerous studies have explored the effects of oil wealth on countries’ political characteristics, especially the level of democracy. Oil has also been associated with a significant electoral incumbency advantage across different political regimes. However, the relationship between oil wealth and incumbent governments’ behaviour, including election-year fiscal manipulation, has been studied to a lesser extent. This article argues that higher oil rents increase election-year public spending as they provide national governments both with direct revenue and increased financing opportunities. However, fiscal transparency mitigates this effect. Consequently, oil-induced electoral budget cycles decrease as fiscal transparency increases. Using a high-quality measure of fiscal transparency in a panel of countries, robust evidence in favour of this argument is found. The findings suggest that many of the previous results on the political effects of oil, including incumbency advantage, might run through an election-year spending channel, and that fiscal institutions might matter substantially for the political effects of oil.     

Budget Process Reform: Waiting for Godot

The unraveling of the budget process described by Irene Rubin will have extraordinary consequences for the long-term budget outlook facing the nation. The retirement of the baby boom generation will prompt unprecedented and unsustainable structural fiscal imbalances for decades to come. Early policy action on the spending and revenue sides of the budget is critical to avert fiscal and economic crisis and to phase in changes in order to avoid precipitous and politically perilous actions in the future. Yet such actions constitute what amounts to a politically unnatural act, as one generation of political leaders is asked to make sacrifices in current policies benefiting future generations. Budget process reforms can serve to highlight the salience of these issues and help deal with the significant political hurdles faced by decision makers in making these intertemporal budgeting trade-offs. Ironically, the need for budget rules and processes has intensified as policy makers have become more vulnerable to polarized political parties, ever more watchful media, and mobilized interest groups. Budget rules and processes can help policy makers cope by protecting their ability to make the hard choices that will be necessary. The pressures for budget process reform will accelerate as the current financial crisis increases near-term budgetary pressures, promoting greater alignment between near-term and long-term fiscal problems.     

Electoral cycles in active labor market policies

We examine how electoral motives influence active labor market policies that promote (short term) job-creation. Such policies reduce measures of unemployment. Using German state data for the period 1985 to 2004, we show that election-motivated politicians pushed job-promotion schemes before elections.     

Random timing of elections and the political business cycle

In his 1975 paper, Nordhaus formally proves that governments whose aim is to be reelected, will generate ‘political’ business cycles. Empirical results do not confirm this proposition, especially in countries used to early elections. We show that if there is a non-zero probability for elections to be called before the legal term, the political business cycle will be less pronounced, even if no early election actually takes place; moreover, if the normal electoral cycle is interrupted before the legal term, one might observe an inversion of the business cycle, or no cycle at all.     

Redistribution in a political union: The case of the EU

A key function of centralized budgets in federal and political unions is to act as an equalizing mechanism to support economic and social cohesion. This is also the case with the European Union's (EU) budget, which operates as a redistributive mechanism that counteracts the cross-national and cross-regional inequalities created by the single market. Despite the limits on cross-national redistribution imposed by a centrifugal system of representation, the net fiscal position of member states – what they pay to the EU budget minus what they receive from it – is very diverse and has changed quite remarkably over the last decades. In this paper, we investigate how and why the net fiscal position of each member state toward the rest of the EU changes over time. We develop a novel panel dataset (1979–2014) to study how key national and EU-level political and economic variables affect the EU redistributive dynamics. We find that redistribution via the EU budget primarily targets developments in inequality within EU member states, and that an increase in domestic unemployment may also improve the country's fiscal balance. Moreover, we find that voting power in the Council is unrelated to a more positive fiscal balance. However, we find that governments with a centre-right profile are in general more successful in improving their redistributive position vis-à-vis the other member states. This may create a problem of budgetary ‘rent extraction’.