Electoral manipulation via voter-friendly spending: Theory and evidence

We present a model of the political budget cycle in which incumbents try to influence voters by changing the composition of government spending, rather than overall spending or revenues. Rational voters may support an incumbent who targets them with spending before the election even though such spending may be due to opportunistic manipulation, because it may also reflect sincere preference of the incumbent for types of spending voters favor. Classifying expenditures into those which are likely targeted to voters and those that are not, we provide evidence supporting our model in data on local public finances for all Colombian municipalities. Our findings indicate both a pre-electoral increase in targeted expenditures, combined with a contraction of other types of expenditure, and a voter response to targeting.     

When do more selfish politicians manipulate less,not more?

We model the political manipulation of deficits in a political budget cycle model. Assuming that a share of voters suffers from debt illusion the incumbent can increase her re-election chances by expanding government spending. However, the optimal manipulation may exceed the amount necessary to maximize re-election chances (over-manipulation) if the deficit is not very costly (low repayment obligation). Then, more selfish politicians (higher ego rents and, therefore, increased re-election motivation) reduce the over-manipulation. Conversely, “excessive” spending may wrongly be interpreted as opportunistic government manipulation. Theoretical results are supported empirically, with very robust evidence in a sample of 87 democracies.     

Revenue decentralization,central oversight and the political budget cycle: Evidence from Israel

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999–2009. We find that high dependence on central government transfers – as reflected in a low share of locally raised revenues in the municipality's budget – exacerbates political budget cycles, while tight monitoring – exercised through central government appointment of external accountants to debt accumulating municipalities – eliminates them. We also find that this pattern is predominantly accounted for by development expenditures. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.     

Transparency and Manipulation of Public Accounts

We study the policy choices of an incumbent politician when voters imperfectly observe aggregate spending and the incumbent’s ability. We show that total spending is decreasing in the transparency of spending, but increasing in the transparency of the incumbent’s ability. The model further provides a possible explanation of the choice of inefficient tools of redistribution, and investigates the incentives for politicians to manipulate public accounts. We show that politicians may choose inefficient and manipulable tools, but that this choice has positive welfare consequences because it leads to a reduction in spending.     

Public debt in a basic endogenous growth model

We work out the mechanism that makes public debt affect the allocation of resources in the long-run. To do so we analyze an AK growth model with elastic labor supply and a government sector. The government levies a distortionary income tax and issues bonds to finance lump-sum transfers and non-distortionary public spending. We show that the long-run growth rate is the smaller the higher the debt ratio if the government adjusts public spending to fulfill its inter-temporal budget constraint. If the government adjusts lump-sum transfers the public debt ratio does not affect the balanced growth rate.     

Fiscal transparency, political parties, and debt in OECD countries

Many believe and argue that fiscal, or budgetary, transparency has large, positive effects on fiscal performance. However, the evidence linking transparency and fiscal policy outcomes is less compelling. To analyze the effects of fiscal transparency on public debt accumulation, we present a career-concerns model with political parties. This allows us to integrate as implications of a single model three hitherto-separate results in the literature on deficit and debt accumulation: that transparency decreases debt accumulation (at least by reducing an electoral cycle in deficits), that right-wing governments (at least for strategic reasons) tend to have higher deficits than left-wing governments, and that increasing political polarization increases debt accumulation. To test the predictions of the model, we construct a replicable index of fiscal transparency on 19-country OECD data. Simultaneous estimates of debt and transparency strongly confirm that a higher degree of fiscal transparency is associated with lower public debt and deficits, independent of controls for explanatory variables from other approaches.     

Fiscal transparency,government effectiveness and government spending efficiency: Some international evidence based on panel data approach

The global financial crisis and the debt crisis of the EU countries revealed serious weaknesses in fiscal reporting. As a consequence, uncertainties regarding the real situation of the public accounts of the countries raised doubts in relation to the effectiveness of government policies. Since then, countries are undertaking reforms in order to improve fiscal transparency. This paper analyzes whether countries are making efforts to enhance fiscal transparency, and whether fiscal transparency affects government effectiveness and government spending efficiency. We consider two channels through which this effect occurs. The first channel is indirect and it works through public debt. The second channel is the direct effect that transparency has on government effectiveness and government spending efficiency once transparency enhances accountability and thus the task of resource allocation. We use a sample of 82 countries (68 developing and 14 developed) for the period 2006–2014, and panel data analysis. Comparing the scores of fiscal transparency between 2006 and 2014, we observe that approximately 80 per cent of the countries made efforts to improve fiscal transparency. The results suggest fiscal transparency is important to reduce public debt and to improve government effectiveness and government spending efficiency.     

SIGNALING THROUGH POLITICAL CAMPAIGNS: ELECTIONS AS A REVELATION MECHANISM

Political campaigns are usually seen either as a way of passing information about candidates' intended policies to the voters or as a political liability of the candidates towards the interest groups that finance them. We provide a different interpretation of political campaigns using a political competition model for campaign promises and spending. In a principal–agent framework, elections are shown to be a truth revelation mechanism, in which the principal (voters) induces truthful revelation of ability by the agent (candidates). Campaign promises and spending coexist as an integral part of this mechanism. Political competition is then derived endogenously.     

The Effects of Fiscal Consolidation and Welfare Composition of Spending on Electoral Outcomes: Evidence from US Gubernatorial Elections between 1978 and 2006

This study attempts to make a contribution to the field of spending aspects of fiscal policy and their impacts on electoral outcome. Due to varying degrees of financial responsibilities and commitments to provide public goods and services, US state governments serve as a perfectly natural laboratory to test the electoral significance of fiscal policies. We adopt a probit model, with several specifications, to determine significant impacts of fiscal consolidation and increases in welfare spending on US gubernatorial elections from 1978 to 2006. The analyses show that voters are more concerned about the increase in debt than current budget deficits. An increase in welfare spending is negatively associated with reelection. Moreover, the impact of taxation on gubernatorial elections turns out to be insignificant. In particular, findings suggest that the political business cycle model does not hold true in US gubernatorial elections. Expansionary fiscal policy right before the election may not have crucial impacts on the chances of an incumbent winning the election.     

Tactical Redistribution Between Regions When Parties and Voters Care About Ideology

In this paper, redistributive transfers between regions are examined in a political economy model where both parties and voters are led by selfish as well as ideological motives, the latter taking the form of egalitarian objectives. Parties announce election platforms about how to distribute funds between regions and different income types, and voters react to these platforms when casting their vote. It is found that regional transfers are completely tactical; it is the political power of a region that decides if it will be a receiver or a contributor. Ideological goals are reached by redistributive transfers between different income types.     

Budget Deficits and Redistributive Politics

This paper proposes a new view of the forces in the political process thatcause governments to accumulate debt. The analysis builds on a model of redistributive politics that, contrary to median voter models, does not restrict the set of policies that politicians can propose. I show that deficits occur even in an environment where voters (and periods) are homogeneous. This is an environment where previous political theories of debt would predict budget balance. In the model deficits are a way for candidates to better target promises to voters and are therefore used as tools of redistributive politics. The main contribution of the analysis is to show that the same forces that push candidates to redistribute resources across voters to pursue political advantage are forces that generate budget deficits.     

Public Debt, Migration, and Shortsighted Politicians

We analyze a model where local public debt levels are set by politicians who are chosen in local elections. Migration causes an externality across districts, and leads to overaccumulation of local public debt. Since debt is a strategic substitute, the median voters in each district prefer shortsighted political leaders who “borrow and spend,” thereby exacerbating the problem of overaccumulation of local public debt.     

Pension reserve fund,political budget cycles and fiscal illusion

We model political manipulations of pension reserve funds in a modified Shi and Svensson (2006) political budget cycle (PBC) model. Assuming that a share of voters suffers from fiscal illusion the incumbent can increase her re-election chances by prematurely spending parts of the reserve fund. We also obtain results that are counterintuitive, but only at first sight. First, it can be shown that the incumbent wants to reduce the manipulation when her ego rent increases. Second, the optimal magnitude of manipulation does not necessarily go up when the share of voters suffering from fiscal illusion rises.     

The size and scope of government:: Comparative politics with rational politicians

We try to demonstrate how economists may engage in research on comparative politics, relating the size and composition of government spending to the political system. A Downsian model of electoral competition and forward-looking voting indicates that majoritarian – as opposed to proportional – elections increase competition between parties by focusing it into some key marginal districts. This leads to less public goods, less rents for politicians, more redistribution and larger government. A model of legislative bargaining and backward-looking voting indicates that presidential – as opposed to parliamentary – regimes increase competition between both politicians and voters. This leads to less public goods, less rents for politicians, less redistribution, and smaller government. We confront these predictions with cross-country data from around 1990, controlling for economic and social determinants of government spending. We find strong and robust support for the prediction that the size of government is smaller under presidential regimes, and weaker support for the prediction that majoritarian elections are associated with less public goods.     

Political frictions and public policy outcomes

We study the role of political frictions in public policy outcomes. We propose a simple model of fiscal policy that combines a lack of commitment by the government, political turnover, and another political friction that can be interpreted either as political polarization or as public rent-seeking. We show that political turnover increases public debt levels, while political polarization or public rent-seeking leads to higher public spending. We evaluate the importance of different political frictions for fiscal policy outcomes using a sample of twenty developed countries. We find that the data on political instability combined with the data on public rent-seeking explain 25% of the variation in public debt levels.     

Local Government Spending and At-Large Versus District Representation; Do Wards Result in More “Pork”?

The issue of at-large versus ward representation has recently again become controversial. Wards are argued to better represent minorities, both ethnic and preference. However, an opposing argument is that wards encourage spending. It is suggested that one reason for this is that, with ward representation, a coalition can be put together to exploit other areas of the city. This question is tested empirically and it is found that spending, debt, and taxes are both significantly and substantially higher in cities where ward representatives have greater power than in cities where at-large representatives have the greater power. It is conjectured that this same effect results in higher state and federal expenditures than would be desired by the majority of voters.     

Does higher government debt link to higher social expenditure? New method,new evidence

Scholars believe that higher social expenditures are usually linked with higher government debts, whereas higher debts reduce social expenditures. However, it is reasonable to speculate that higher government debt may contribute to higher social spending, while fiscal deficits occur during a recession, which commonly creates greater demand for social expenditure. For a deeper investigation, this paper revisits the dynamic relationship between social spending and public debts in the time-frequency domain, using the novel wavelet-coherency analysis as well as the phase-difference technique to derive the co-moved and causal relationships between social spending and public debts in 13 OECD countries. The evidence identifies a dynamic relationship between variables. While higher social expenditures increase government debts, the shocks from government debts to social expenditures are conversely uncertain. We discover that higher government debt does reduce social expenditures, but it may be linked to higher social spending. The robustness of partial coherency and phase-difference discovers the role of a political party in the decision over social welfare programmes in the sample countries.     

Human capital formation and public debt: growth and welfare effects of three different deficit policies

We analyze an endogenous growth model public educational spending. We show that the balanced budget policy and the policy with a slight deficit yield higher growth than a debt policy where public debt grows at the same rate as GDP, unless the government is a creditor. As concerns welfare, it can be demonstrated that a strong deficit policy yields lower welfare than a balanced budget and a slight deficit policy, unless initial debt ratios are low and the intertemporal elasticity of substitution is high. Finally, there may exist an inverted U-shaped relation between welfare and deficit-financed educational spending.     

Income inequality and economic growth in an open economy

Income inequality has a strong impact on fiscal policy when majority voting enables those individuals with less-than-average income to decide on tax rates. This study analyzes the impact on economic growth of income inequality in an open economy where tax revenues are partially used for international transfers. In any case, income inequality is harmful for growth. In an economic union, positive effects of international integration raise the growth rate as long as net transfers do not grow proportionally. In a political union, unionwide voting makes distributive politics depending on the union's median voter. In this case, additional output growth on aggregate level is a necessary, but not sufficient condition for a majority of voters to accept union membership.     

Monetary policy and fiscal limits with no-default

This paper discusses monetary and fiscal policy interactions that stabilize government debt. Two distortions prevail in the model economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include a ceiling on the equilibrium debt-to-GDP ratio, zero or negative elasticity of tax revenues, and a political intolerance of raising tax rates. At the fiscal limit two mechanisms restore solvency: fiscal inflation, which reduces the real value of nominal debt, and open market operations, which diminish the size of government debt held by the private sector. Three regimes achieve this goal. In all regimes monetary policy is passive. In all regimes a muted tax response to government debt is consistent with equilibrium. The propensity of a fiscal authority to smooth output is found to determine what is an acceptable response (in the form of tax rate changes) to the level of government debt, while monetary policy determines the timing and magnitude of fiscal inflation. Impulse responses show that the inflation and tax hikes needed to offset a permanent shock to transfers are lowest under nominal interest rate pegs. In this regime, most of the reduction in the real value of government debt comes from open market purchases.