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Political Budget Cycles from a Party-Political Perspective

Abel Bojar
The London School of Economics & Political Science
Abel Bojar
The London School of Economics & Political Science
Open Panel

Abstract

The political economy of budgeting has been one of the most fertile research areas in recent decades. With the onset of sovereign debt crises across advanced industrial economies, the determinants of different fiscal outcomes have come under the spotlight once again. This paper will offer a critical empirical analysis on a consensual understanding of fiscal policy making: weak, fragmented governments are prone to overspending because of the common pool of fiscal resources that individual actors – legislators, spending ministers or political parties – draw upon. The notion of government weakness being associated with excessive spending, however, is at odds with the premises of political budget cycle theory, whereby opportunistic incumbents relax fiscal policy in the run-up to elections to increase their reelection chances. To the extent that such opportunism is constrained by veto players in the political process, government fragmentation should be associated with smaller/less frequent cycles and government cohesion/strength with larger and more regular ones. This paper will thus offer an alternative account on fiscal outcomes by drawing an important distinction between long-term average and short-term dynamic outcomes around election years. In particular, individual actors – political parties for the current purposes - will be modelled to manoeuvre within the constraints of a veto game, whereby coalition partners and/or opposition parties may have an incentive to veto the opportunistic spending plans of the dominant party in the coalition. Using time-series cross-section (TCSC) regressions on a sample of 27 EU member states over 19 years, my empirical results confirm my theoretical expectations: Single-Party Governments and government settings in which the Prime Minister and the Finance Minister are delegated by the same party exhibit greater cyclicality in fiscal aggregates.