Summary
How do incumbent parties attempt to enhance their re-election prospects through fiscal policies? Do they manipulate the overall level of public spending and revenue or reallocate their components while not necessarily changing the total level? And what political considerations might explain the occurrence and magnitude of such opportunistic fiscal manipulations? Answering these questions is important, as examining the electoral effects on the budget deficit at the central government level would potentially shed light on the evolution of a country’s public debt. Additionally, election-driven adjustments in the composition of government expenditures and revenues may significantly affect national general welfare, if, for example, they reallocate spending to narrow programs such as region-specific grants, sacrificing broad programs such as social insurance and pensions. Finally, it is also important to identify the conditions under which these fiscal manipulations and their possible economic effects might be observed.
In this Nottingham School of Economics working paper Morozumi, Veiga and Veiga address these questions with an empirical analysis. For this purpose, they assemble a unique database of disaggregated spending and revenue series at the central government level, for a panel of up to 107 countries, over the 1975-2010 period. Applying panel data econometric techniques to this data, they show that under some specific political environments (e.g., close elections, uninformed voters and new democracies), incumbents generate political budget cycles, predominantly by increasing current, rather than capital, spending and reducing taxes, most often income taxes. However, when democracies are matured (in which voters are more experienced), central governments reallocate their expenditure and revenue components in election years, without changing their total levels. Specifically, they reallocate spending from capital expenditures to grants to other government units (i.e., state/local governments), while reducing income taxes and increasing consumption taxes instead.
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CFCM Working Paper 14/16, Electoral Effects on the Composition of Public Spending and Revenue: Evidence from a Large Panel of Countries by Atsuyoshi Morozumi, Francisco Veiga and Linda Veiga, November 2014
Authors
Atsuyoshi Morozumi, Francisco José Veiga and Linda Gonçalves Veiga
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Posted on Saturday 1st November 2014