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The role of the past in public policy: empirical evidence of the long-term effect of past policy and politics on the local budget balance

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Abstract

The main focus of this paper is on the role of the past in budgetary policy and the impact of a multitude of relevant political characteristics on the local budget balance in a dynamic context. Although the importance of past policy was stated approximately 6 decades ago by Lindblom (Public Adm Rev 19(2):79–88, 1959), dynamic studies are relatively underexposed in recent literature on the budget balance at the local government level. The studies that do take into account the dynamics surprisingly do not focus on the past but treat it as a control variable. This paper exhibits the theoretical background of introducing past performance into the analysis. It is also noticeable that the dynamic studies thus far only test the partisan and the political budget cycle hypotheses. In the empirical part of this study, we add government fragmentation and government power to the dynamic analysis, and we look for both short- and long-term effects on the budget balance. In doing so, we test the impact of multiple political characteristics simultaneously on a dataset of all Flemish local governments for the period 1995–2017. The results from the dynamic panel analysis show that past performance is of importance, as are the electoral budget cycle and the power of the government. The importance of the government power for the budget balance is a new insight in dynamic research. As we focus on the long-term impact of the explanatory variables due to the dynamics, we avoid the underestimation of the impact of politics on the budget balance in the long run.

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Notes

  1. Where n is the number of population districts in the nation (Primo and Snyder 2008).

  2. The difference between the budgeted revenue and expenditure plus the results of preceding years minus the unavailable funds.

  3. The exploitation revenues contain three categories: compensations, transfers and revenues from financial assets. The exploitation expenditures are calculated based on four financial categories: staff expenditures, production costs, transfers and capital payments on loans.

  4. The data is made real in 1995 prices using the Consumer Price Index from Statbel (2018).

  5. The data regarding the individual ideological score of the parties are extracted from Deschouwer (1996) for 1995–1999, Rihoux (2001) for 2000–2005, Buelens et al. (2008) for 2006–2011 and Blockmans et al. (2013) for 2012–2017. The data are based on surveys completed by the president of the College of Mayor and Aldermen or by the spokesman of the college. They were required to order their political party on a scale from 0 (left) to 10 (right).

  6. If one writes out the effect of xt on y in the long run (from time t onward), it can be seen that this gives an infinite sum of the form: \(\beta \left( {1 + \gamma ^{1} + \gamma ^{2} + \gamma ^{3} \ldots } \right)\) . Using the standard infinite sum formula for geometric series, this becomes \({\frac{\beta }{1 - {{\gamma }}}}\) (Abbassi and Linzert 2012; Wooldridge 2015).

  7. We use the mche resampling scheme drawing from the normal distribution and the deterministic initialization of the xtbcfe of De Vos et al. (2015).

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Acknowledgements

The authors are grateful to Benny Geys, Freddy Heylen, Ilse Ruyssen and the reviewers and editor of the journal for their helpful comments and suggestions on an earlier version of this study. Additionally, financial support from Ghent University, the Special Research Fund Starting Grant (Bijzonder Onderzoeksfonds Startkredieten) is acknowledged (no involvement in research). We thank MICE for sharing the construct of the political variables dataset.

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  1. Department of Economics, Faculty of Economics and Business Administration, Ghent University, Tweekerkenstraat 2, 9000, Ghent, Belgium

    Stefanie Vanneste & Stijn Goeminne

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  1. Stefanie Vanneste
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Correspondence to Stijn Goeminne.

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Appendices

Appendix 1

See Table 4.

Table 4 Definitions and descriptive statistics.
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Appendix 2

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Table 5 Correlation matrix
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Vanneste, S., Goeminne, S. The role of the past in public policy: empirical evidence of the long-term effect of past policy and politics on the local budget balance. Econ Gov 21, 75–99 (2020). https://doi.org/10.1007/s10101-019-00232-4

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