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Conditional political budget cycles: a review of recent evidence

Abstract

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.

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Notes

  1. Whereas several older studies (e.g., Paldam 1979) focus on electoral cycles in economic outcomes (often referred to as political business cycles), subsequent research has focused on such cycles in government instruments, such as fiscal policy. As to election cycles in economic outcomes, Franzese (2002, p. 378) concludes that “the empirical literature uncovers some possible, but inconsistent and weak evidence for electoral cycles in macroeconomic outcomes, with evidence for cycles in real variables generally weakest (but not wholly absent).” See Eslava (2011) for a more recent and broad survey on the political economy of budget deficits.

  2. This presumes that voting behavior is at least in part determined by economic outcomes. There is substantial evidence for this; see, for instance, Paldam (2003).

  3. If the incumbent is sure to be reelected there is no need for this manipulation (Frey and Schneider, 1978a, 1978b). For recent studies investigating whether electoral competitiveness influences the degree to which governments manipulate fiscal policy we refer to Alt and Rose (2009), Efthyvoulou (2012), Aidt et al. (2011), and Veiga and Veiga (2012). Also term limits may condition the occurrence of PBCs. See, for instance, Besley and Case (1995, 2003), Veiga and Veiga (2007), and Schneider (2010). These contextual features of PBCs are not discussed in the present review.

  4. Brender (2003) and Brender and Drazen (2008) report similar findings for elections in Israel and a sample of 74 countries, respectively. For the case of Brazil, Arvate et al. (2009) also find that a fiscal surplus may enhance the reelection chances of state governors, depending on how ‘sophisticated’ voters are. However, Aidt et al. (2011), Klomp and de Haan (2012) and Jones et al. (2012) report that election-induced deficits enhance the incumbents’ reelection prospects.

  5. Rogoff’s (1990) signaling model also has implications for the composition of government spending but yields a different prediction. The model assumes information asymmetries about the incumbent’s competence in administering the production of public goods. Voters observe taxes and current expenditures contemporaneously but not governmental investment expenditures, and use this information to form inferences concerning the incumbent’s competence. The model gives rise to a separating equilibrium, in which the competent incumbent has an incentive to increase easily observed current expenditures and reduce less visible capital expenditures.

  6. There is similar evidence for lower levels of government. For instance, Schneider (2010) finds that even though incumbents on the German state level reduce deficit spending and maintain a balanced budget they do increase social transfers in the pre-election period, while Dahlberg and Mörk (2011) report a statistically significant election year effect in local public employment in Finland and Sweden.

  7. In their empirical analysis, Alt and Rose focus on government spending, arguing that PBCs are stronger in spending than in taxes and deficits. In contrast, a substantive part of the recent literature as summarized in Sect. 2 of this review also reports PBCs in budget deficits.

  8. For additional papers on PBCs in the EU, we refer to Andrikouplos et al. (2004) and Donahue and Warin (2007).

  9. There is also some evidence based on local elections in established democracies. For instance, using data from 278 Portuguese municipalities from 1979 to 2005, Aidt et al. (2011) report support for an election effect. They also find that the magnitude of the opportunistic distortion increases the win-margin and conversely, that the win-margin has a negative effect on the opportunistic distortion.

  10. Brender and Drazen (2005) find that if the sample of industrial countries contains only established democracies, the political budget cycle found in the group of industrial countries as a whole disappears. Likewise, while there is a statistically significant election effect in their sample of developing countries as a whole, this is due entirely to the new democracies. We will discuss this argument in more detail below.

  11. To be more precise, they use the Transparency International index of corruption and the sum of five indicators of the International Country Risk Guide (ICRG). The indicators used from the latter source are: rule of law, corruption in government, quality of the bureaucracy, risk of expropriation of private investment, and risk of repudiation of contracts.

  12. There is some related research on the intermediary role of media between the electorate and politicians. A good example is the study by Besley and Burgess (2002). Based on panel data for Indian states from 1958 to 1992, they examine how responsive state governments in India are to several shocks. They find that wider newspaper circulation is associated with government being more responsive to falls in food production and flood damage. Strömberg (2004) models the incentives of the media to deliver news to different groups in society.

  13. Von Hagen and Wolff (2006) find that the SGP has generated incentives for creative accounting in order to comply with the requirement of keeping deficits under the 3 % limit.

  14. Some country-specific studies also reach this conclusion. Khemani (2004) examines state legislative assembly elections in 14 major states of India, and reports that election years have a large positive impact on investment spending, particularly on the construction of roads, to the detriment of current expenditures. Using data on Colombian municipalities, Eslava (2005) also reports pre-electoral shifts of resources from current spending towards infrastructure-related projects.

  15. Sakurai and Menezes-Filho (2011) present evidence of electoral cycles in Brazilian municipalities for the period after the country’s return to democracy. Their results point to a decrease in the fiscal surplus in election years, which occurs because current local expenditures rise and local tax revenues decline. The authors do not examine whether this election effect becomes weaker over time.

  16. The authors justify their finding that opportunistic effects were smaller in the early years of democracy than afterwards by the fact that the political environment was more unstable immediately after the 1974 Revolution. In the early years of democracy, the uncertainty about the ability to complete a four-year term made it difficult for the incumbent party to plan and implement electoral policies. In the later years of the sample, strong single-party governments managed to stay in office for their full terms.

  17. See Dabla-Norris et al. (2010) for some recent work on budgetary processes in a sample of low-income countries.

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Acknowledgements

The authors like to thank three reviewers and the editor for their very helpful feedback on a previous version of the paper. The views expressed do not necessarily reflect the views of DNB.

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Correspondence to Jakob de Haan.

Appendices

Appendix 1

Table 4 Studies on conditionality discussed in this review

Appendix 2

Table 5 Sources and description of data used
Table 6 Countries included in the correlation matrix

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de Haan, J., Klomp, J. Conditional political budget cycles: a review of recent evidence. Public Choice 157, 387–410 (2013). https://doi.org/10.1007/s11127-013-0106-6

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Keywords

  • Political budget cycles
  • Conditionality
  • Survey

JEL Classification

  • E62
  • H62