Skip to main content

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

Abstract

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.

This is a preview of subscription content, access via your institution.

References

  1. Akhmedov, A., & Zhuravskaya, E. (2004). Opportunistic political cycles: test in a young democracy setting. The Quarterly Journal of Economics, 119(4), 1301–1338.

    Article  Google Scholar 

  2. Alesina, A., Cohen, G. D., & Roubini, N. (1993). Electoral business cycle in industrial democracies. European Journal of Political Economy, 9(1), 1–23.

    Article  Google Scholar 

  3. Alesina, A., & Roubini, N. (1992). Political cycles in OECD economies. Review of Economic Studies, 59(4), 663–688.

    Article  Google Scholar 

  4. Alesina, A., Roubini, N., & Cohen, G. D. (1997). Political cycles and the macroeconomy. Cambridge: MIT Press.

    Google Scholar 

  5. Alesina, A., & Tabellini, G. (1990). A positive theory of fiscal deficits and government debt. Review of Economic Studies, 57(3), 403–414.

    Article  Google Scholar 

  6. Alt, J. E., & Chrystal, K. A. (1983). Political economics. Berkeley: University of California Press.

    Google Scholar 

  7. Alt, J. E., & Lassen, D. (2006). Fiscal transparency, political parties, and debt in OECD countries. European Economic Review, 50(6), 1403–1439.

    Article  Google Scholar 

  8. Angelopoulos, K., & Economides, G. (2008). Fiscal policy, rent seeking and growth under electoral uncertainty theory and evidence from the OECD. Canadian Journal of Economics, 41(4), 1375–1405.

    Article  Google Scholar 

  9. Angelopoulos, K., Economides, G., & Kammas, P. (2007). Tax-spending policies and economic growth: theoretical predictions and evidence from the OECD. European Journal of Political Economy, 23(4), 885–902.

    Article  Google Scholar 

  10. Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.

    Article  Google Scholar 

  11. Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51.

    Article  Google Scholar 

  12. Armingeon, K., Gerber, M., Leimgruber, P., & Beyeler, M. (2008). The comparative political data set 1960–2006. Berne: Institute of Political Science, University of Berne.

    Google Scholar 

  13. Ashworth, J., & Heyndels, B. (2002). Tax structure turbulence in OECD countries. Public Choice, 111(3–4), 347–376.

    Article  Google Scholar 

  14. Belke, A., Baumgärtner, F., Schneider, F., & Setzer, R. (2007). The different extent of privatization proceeds in OECD countries: a preliminary explanation using a public-choice approach. FinanzArchiv: Public Finance Analysis, 63(2), 211–243.

    Article  Google Scholar 

  15. Besley, T., & Case, A. (1995). Does electoral accountability affect economic policy choices? Quarterly Journal of Economics, 110(3), 769–798.

    Article  Google Scholar 

  16. Blais, A., & Nadeau, R. (1992). The electoral budget cycle. Public Choice, 74(3), 389–403.

    Google Scholar 

  17. Block, S. (2002). Elections, electoral competitiveness, and political budget cycles in developing countries. Harvard University CID Working Paper No. 78.

  18. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.

    Article  Google Scholar 

  19. Bräuninger, T. (2005). A partisan model of government expenditures. Public Choice, 125(3), 409–429.

    Article  Google Scholar 

  20. Breitung, J., & Pesaran, M. H. (2008). Unit roots and cointegration in panels. In L. Matyas & P. Sevestre (Eds.), The econometrics of panel data (pp. 279–322). Berlin: Springer.

    Chapter  Google Scholar 

  21. Brender, A., & Drazen, A. (2005). Political budget cycles in new versus established democracies. Journal of Monetary Economics, 52(7), 1271–1295.

    Article  Google Scholar 

  22. Brender, A., & Drazen, A. (2008). How do budget deficits and economic growth affect reelection prospects? Evidence from a large panel of countries. American Economic Review, 98(5), 2203–2220.

    Article  Google Scholar 

  23. Brender, A., & Drazen, A. (2009). Do leaders affect government spending priorities? NBER Working Papers No. 15368.

  24. Cukierman, A., & Meltzer, A. H. (1986). A positive theory of discretionary policy, the cost of democratic government, and the benefits of a constitution. Economic Inquiry, 24(3), 367–388.

    Article  Google Scholar 

  25. Cusack, T. (1997). Partisan politics and public finance: changes in public spending in the industrialized democracies, 1955–1989. Public Choice, 91(3–4), 375–395.

    Article  Google Scholar 

  26. Drazen, A. (2000). The political business cycle after 25 years. NBER Macroeconomic Annual, 15, 75–117.

    Article  Google Scholar 

  27. Drazen, A., & Eslava, M. (2010). Electoral manipulation via voter-friendly spending: theory and evidence. Journal of Development Economics, 92(1), 39–52.

    Article  Google Scholar 

  28. Franzese, R. J. (2000). Electoral and partisan manipulation of public debt in developed democracies, 1956–1990. In R. Strauch & Jürgen von Hagen (Eds.), Institutions, politics and fiscal policy (pp. 61–83). Dordrecht: Kluwer Academic.

    Chapter  Google Scholar 

  29. Franzese, R. J. (2002). Electoral and partisan cycles in economic policies and outcomes. Annual Review of Political Science, 5, 369–421.

    Article  Google Scholar 

  30. Gemmell, N., Kneller, R., & Sanz, I. (2007). Tax composition and economic growth in OECD countries. Mimeo.

  31. Gonzalez, M. (2002). Do changes in democracy affect the political budget cycle? Evidence from Mexico. Review of Development Economics, 6(2), 204–224.

    Article  Google Scholar 

  32. Greene, W. H. (2003). Econometric analysis. Englewood Cliffs: Prentice-Hall.

    Google Scholar 

  33. Hadi, A. S. (1992). Identifying multiple outliers in multivariate data. Journal of the Royal Statistical Society, Series B 54(3), 761–771.

    Google Scholar 

  34. Hallerberg, M., & Basinger, S. (1998). Internationalization and changes in tax policy in OECD countries: the importance of domestic veto players. Comparative Political Studies, 31(3), 321–353.

    Article  Google Scholar 

  35. Heckelman, J. C., & Berument, H. (1998). Political business cycles and endogenous elections. Southern Economic Journal, 64(4), 987–1000.

    Article  Google Scholar 

  36. Hibbs, D. A. (1977). Political parties and macroeconomic policy. American Political Science Review, 71(4), 467–487.

    Google Scholar 

  37. Im, S., Pesaran, H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53–74.

    Article  Google Scholar 

  38. Kittel, B., & Winner, H. (2005). How reliable is pooled analysis in political economy? The globalization-welfare state nexus revisited. European Journal of Political Research, 44(2), 269–293.

    Article  Google Scholar 

  39. Kiviet, J. F. (1995). On bias, inconsistency, and efficiency of various estimators in dynamic panel data models. Journal of Econometrics, 68(1), 53–78.

    Article  Google Scholar 

  40. Kneebone, R., & McKenzie, K. (2001). Electoral and partisan cycles in fiscal policy: an examination of Canadian provinces. International Tax and Public Finance, 8(5), 753–774.

    Article  Google Scholar 

  41. Kneller, R., Bleaney, M., & Gemmell, N. (1999). Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics, 74(2), 171–190.

    Article  Google Scholar 

  42. Levitt, S. D. (1997). Using electoral cycles in police hiring to estimate the effect of police on crime. American Economic Review, 87(3), 270–290.

    Google Scholar 

  43. Lindbeck, A. (1976). Stabilization policy in open economies with endogenous politicians. American Economic Review, 66(2), 1–19.

    Google Scholar 

  44. Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61(0), 631–652.

    Article  Google Scholar 

  45. Malley, J., Philippopoulos, A., & Woitek, U. (2007). Electoral uncertainty, fiscal policy and macroeconomic fluctuations. Journal of Economic Dynamics and Control, 31(3), 1051–1080.

    Article  Google Scholar 

  46. McCallum, B. T. (1978). The political business cycle: an empirical test. Southern Economic Journal, 44(3), 504–515.

    Article  Google Scholar 

  47. Milesi-Ferretti, G. M., Perotti, R., & Massimo, R. (2002). Electoral systems and public spending. The Quarterly Journal of Economics, 117(2), 609–657.

    Article  Google Scholar 

  48. Mink, M., & de Haan, J. (2006). Are there political budget cycles in the euro area? European Union Politics, 7(2), 191–211.

    Article  Google Scholar 

  49. Mueller, D. C. (2003). Public choice III. Cambridge: Cambridge University Press.

    Google Scholar 

  50. Nickell, S. J. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417–1426.

    Article  Google Scholar 

  51. Nordhaus, W. D. (1975). The political business cycle. Review of Economic Studies, 42(2), 169–190.

    Article  Google Scholar 

  52. Paldam, M. (1989). Politics matters after all: testing Hibbs’ theory of partisan cycles. Aarhus University, Mimeo.

  53. Peltzman, S. (1992). Voters as fiscal conservatives. The Quarterly Journal of Economics, 107(2), 327–361.

    Article  Google Scholar 

  54. Persson, T., & Tabellini, G. (1990). Macroeconomic policy, credibility and politics. London: Harwood.

    Google Scholar 

  55. Persson, T., & Tabellini, G. (2002). Political economics: explaining economic policy. Cambridge: MIT Press.

    Google Scholar 

  56. Persson, T., & Tabellini, G. (2003). The economic effect of constitutions. Cambridge: MIT Press.

    Google Scholar 

  57. Potrafke, N. (2006). Political effects on the allocation of public expenditures: empirical evidence from OECD countries. DIW Discussion Papers No. 653.

  58. Potrafke, N. (2011, forthcoming). Public expenditures on education and cultural affairs in the German states: does government ideology affect the budget composition? German Economic Review.

  59. Reid, B. G. (1998). Endogenous elections, electoral budget cycles and Canadian provincial governments. Public Choice, 97(1–2), 35–48.

    Article  Google Scholar 

  60. Rodrik, D. (1998). Why do more open economies have bigger governments? Journal of Political Economy, 106(5), 997–1032.

    Article  Google Scholar 

  61. Rogoff, K. (1990). Equilibrium political budget cycles. American Economic Review, 80(1), 21–36.

    Google Scholar 

  62. Rogoff, K., & Sibert, A. (1988). Elections and macroeconomic policy cycles. Review of Economic Studies, 55(1), 1–16.

    Article  Google Scholar 

  63. Roodman, D. (2009a). How to do xtabond2: an introduction to ‘difference’ and ‘system’ GMM in Stata. Stata Journal, 9(1), 86–136.

    Google Scholar 

  64. Roodman, D. (2009b). A note on the theme of too many instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135–158.

    Article  Google Scholar 

  65. Rosenberg, J. (1992). Rationality and the political business cycle: the case of local government. Public choice, 73(1), 71–81.

    Article  Google Scholar 

  66. Saporiti, A., & Streb, J. (2008). Separation of powers and political budget cycles. Public Choice, 137(1), 329–345.

    Article  Google Scholar 

  67. Schneider, C. J. (2010). Fighting with one hand tied behind the back: political budget cycles in the West German states. Public choice, 142(1), 125–150.

    Article  Google Scholar 

  68. Schuknecht, L. (1996). Political business cycles and fiscal policies in developing countries. Kyklos, 49(2), 155–170.

    Article  Google Scholar 

  69. Schuknecht, L. (2000). Fiscal policy cycles and public expenditure in developing countries. Public Choice, 102(1–2), 115–130.

    Google Scholar 

  70. Shi, M., & Svensson, J. (2006). Political budget cycles: do they differ across countries and why? Journal of Public Economics, 90(8–9), 1367–1389.

    Article  Google Scholar 

  71. Tufte, E. (1978). Political control of the economy. Princeton: Princeton University Press.

    Google Scholar 

  72. Veiga, L., & Veiga, F. (2007). Political business cycles at the municipal level. Public Choice, 131(1), 45–64.

    Article  Google Scholar 

  73. Vergne, C. (2009). Democracy, elections and allocation of public expenditures in developing countries. European Journal of Political Economy, 25(1), 63–77.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Margarita Katsimi.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Katsimi, M., Sarantides, V. Do elections affect the composition of fiscal policy in developed, established democracies?. Public Choice 151, 325–362 (2012). https://doi.org/10.1007/s11127-010-9749-8

Download citation

Keywords

  • Political budget cycles
  • Elections
  • Composition of fiscal policy
  • Quality of public expenditure

JEL Classification

  • D72
  • E62