Sep 10, 2013

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. 
We use a large unbalanced cross-country time-series dataset for 65 advanced and developing countries over the period 1975 to 2005.
From the conclusions
We find that in most countries fiscal policy is hardly used for electoral purposes. Using a multilevel voting model for coalition parties in government with a large number of control variables, we find that parties in government can influence the election outcome significantly by manipulating government spending. Government spending also has an indirect positive effect on the support received by the parties in government by promoting faster economic growth in the election year. Although we find a statistically significant effect of election- induced government spending on election outcomes, its economic significance is relatively small. This could explain why fiscal policy is used for election purposes in only a few countries. 
That is from a paper by Jeroen Klomp & Jakob de Haan.

Public Choice made my day!

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