Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities

The paper provides evidence that fiscal rules can limit the political budget cycle. It uses data on Italian municipalities during the 2000s and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian sub-national fiscal rule (Domestic Stability Pact, DSP) introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5000 inhabitants. We find that the political budget cycle increases real capital spending by about 10–20 percent on average in the years prior to municipal elections and that municipalities subject to the DSP show a pre-electoral increase in capital spending which is only a quarter of the one of municipalities not subject to the rule.     

Political budget cycles: Evidence from Italian cities

The introduction of a new real estate taxes in Italy in 2011 provides a natural experiment, which is useful to test for political budget cycles. The new real estate tax allowed discretion to local governments. This generates a random variation in the distance of municipalities from the following elections when they choose the level of the tax rate. We do find substantial evidence of political budget cycles, with municipalities choosing lower tax rates when close to elections. We observe this budget cycle for smaller municipalities where the tax was more likely to be the single most important issue for the local government. Cities close to elections with large deficits did not set lower rates and so did municipalities with a lower average value of properties. Finally, the political budget cycle is stronger in the South.     

Political budget cycles and reelection prospects in Greece's municipalities

This paper considers the presence of political budget cycles in Greece's municipalities. We construct a new dataset from primary sources and we find strong evidence of pre-electoral manipulation through increased expenditures and excessive borrowing. We use a dynamic panel data approach producing evidence of opportunistic behavior in local government finances. Our results are robust in the face of a series of controls including mayors running for reelection, their political alignment with the central government, and prolonged terms. Moreover, the results are robust to the exclusion of small sized municipalities and to the restriction of the time range of our investigation to the post-Maastricht period. We also consider whether opportunistic policies influence incumbents' reelection prospects finding that increased expenditures and election year opportunistic excesses are electorally rewarding. Our findings provide a characterization of opportunistic public finance management in Greek municipalities where electorally motivated budgetary decisions appear impervious to the various municipal reform attempts.     

Defective democracy and the political budget cycle

Using a panel of democracies from 1987 to 2016, this study examines the effect of a defective democracy on the political budget cycle. To separate defective democracies from embedded democracies, we apply cluster analysis to the central elements of democracy. We find that the political budget cycle is significant only in defective democracies. Our finding indicates that the electoral cycle can persist even though democracies become old and economies become advanced. We also find that, of the central elements of democracy, weak rule of law and an ineffective government mainly explain the political budget cycle in defective democracies.     

Political budget cycles: Do they differ across countries and why?

This paper uses a large panel data set to examine the relation between elections and fiscal policy. We find evidence of political budget cycles: on average, government fiscal deficit increases by almost 1% of GDP in election years. Moreover, these political budget cycles are significantly larger, and statistically more robust, in developing than in developed countries. We propose a moral hazard model of electoral competition to explain this difference. In the model, the size of the electoral budget cycles depends on politicians' rents of remaining in power and the share of informed voters in the electorate. Using suitable proxies, we show that these institutional features explain a large part of the difference in electoral budget cycles between developed and developing countries.     

Temporary grant programmes in Sweden and central government behaviour

The purpose of this paper is to study whether the central government in Sweden approves applications for temporary grants from municipalities according to political objectives. We also study factors that determine the municipal decision to apply for temporary grants. Two hypotheses are tested, that the central government supports municipalities with many swing voters in order to influence voters, and that the central government provides benefits to groups that share its ideology and that provide political support. Data is used from three election years 1982, 1985, and 1988. Under the Socialist governments municipalities with a high share of Socialist voters were more likely to apply for grants. The same pattern does not apply to the 1982 Conservative government. There is evidence that Socialist governments approved temporary grants on the basis of party tactical criteria. However, there is no indication of vote purchasing behaviour by the 1982 Conservative government.     

General or central government? Empirical evidence on political cycles in budget composition using new data for OECD countries

Previous studies used general government data to examine whether national governments’ electoral motives and ideology influenced budget composition in OECD countries. General government data includes, however, the state and local level. Using new data for general and central government over the period 1995–2016, I reexamine political cycles in budget composition. The results suggest that, both at the general and central government level, leftwing governments spent more on education and less on public services than rightwing governments. Defense expenditure was somewhat lower under leftwing than rightwing governments and in election years; especially in federal states. Effects of government ideology on the individual expenditure categories are larger at the central than general government level. Scholars need to re-examine results on ideology-induced effects that have been derived from general government data where central government data should have been used.     

Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries

This paper measures sacrifice ratios for all countries in the world over an approximately forty year time period, in addition to exploring the determinants of worldwide sacrifice ratios. We test the most commonly-cited determinants: the speed of disinflation, openness, inflation targeting, central bank independence, and political factors for both OECD and non-OECD countries. We find that the speed of disinflation is the most important determinant of OECD sacrifice ratios, but puzzlingly has no effect on non-OECD nations' disinflation costs. Instead we find evidence that greater central bank independence and more openness are associated with lower non-OECD sacrifice ratios. We also find that the ratio of government debt to GDP – a variable that is not important when it comes to OECD countries – is highly significant for non-OECD economies. Specifically, we find that higher indebtedness is associated with lower sacrifice ratios in non-OECD nations, suggesting that greater levels of debt do not lead to higher expectations of inflation. Furthermore we find evidence that the negative impact of debt on non-OECD sacrifice ratios is being driven by middle income economies.     

The dynamic adjustment of local government budgets: does Spain behave differently?

The aim of this article is to analyse whether Spanish municipalities adjust in response to budget shocks and (if so) which elements of the budget they are more likely to adjust. The methodology we use to answer these questions is a Vector Error Correction Model (VECM), estimated with data from a panel of Spanish municipalities during the period 1988 to 2006. Our results confirm that Spanish municipalities do indeed make adjustments in response to fiscal shocks (i.e. the deficit is stationary in the long run). We compare our results with those obtained for US and Germany to evaluate if the viability of local finance depends on the institutional arrangement and to analyse how it affects the adjustment patterns. We observe that grants have a more important role in the adjustment process in environments where either they have an equalization objective or where there is no clear rule that determines their distribution. This fact can generate a moral hazard problem: governments tend to spend more due to the expected intervention by the central government. Own revenues have a lower adjustment capacity in environments where subcentral governments have limited fiscal autonomy. These results, however, suggest that the viability of the local finance system is feasible with different institutional arrangements.     

Participatory budgeting and the pattern of local government spending: Evidence from South Korea

We use a panel of Korean municipalities to examine the impact of participatory budgeting on local government expenditures. We find that participatory budgeting systematically alters the pattern of local spending. Municipalities using participatory budgeting reallocate resources toward more immediate and visible expenditures and away from long-term development expenditure. We also find evidence that participatory budgeting affects the municipal budget by a greater amount than the expenditures directly allocated through participatory budgeting. Our findings indicate that participatory budgeting leads to the reallocation of local public spending by increasing information flows between policymakers and service users.     

MACROECONOMIC POLICY AND ELECTIONS IN OECD DEMOCRACIES*

The purpose of this paper is to test for evidence of opportunistic “political business cycles” in a large sample of 18 OECD economies. Our results can be summarized as follows: 1) We find very little evidence of pre-electoral effects on economic outcomes, in particular, on GDP growth and unemployment; 2) We see some evidence of “political monetary cycles,” that is, expansionary monetary policy in election years; 3) We also observe indications of “political budget cycles,” or “loose” fiscal policy prior to elections; 4) Inflation exhibits a post-electoral jump, which could be explained by either the pre-electoral “loose” monetary and fiscal policies and/or by an opportunistic timing of increases in publicly controlled prices, or indirect taxes.     

Between centralized and decentralized welfare policy: Have national guidelines constrained the influence of local preferences?

Decentralized welfare services allow more flexibility toward individual needs assessment, but may also have negative consequences such as welfare competition or lack of equity between regions. Does national standardization require full centralization of individual assessment, or can a set of unbinding national guidelines reduce unwanted variation between regions? The case of this article is a national benefit norm for municipal social assistance payments issued by the Norwegian central government in 2001. A large share of municipalities changed their local norms to match the national norm in the following years, but data show that local benefit norms are uncorrelated with the actual payments. The apparent compliance to national guidelines does not translate into actual welfare generosity.Although caseworker discretion is important for individual payments, the municipal level of welfare payments is clearly influenced by local preferences and budget constraints. This implies that political control is active, but through other instruments than the local benefit norms.     

Fiscal rules and budget forecast errors of Italian municipalities

We study the impact of the domestic stability pact on the accuracy of budget forecasts of Italian municipalities. Identification of the causal effect exploits a quasi-natural experiment generated by the removal in 2001 of the fiscal restraints on budget decisions for municipalities with fewer than 5000 inhabitants and by stricter budgetary restrictions and severe penalties for noncompliers in 2002. We find that relaxing fiscal rules had a sizeable impact on budget forecast errors, especially in 2002. In fact, revenue (expenditure) forecast errors for municipalities with fewer than 5000 inhabitants became 26% (22%) larger than in the past.     

The effects of inter-municipal cooperation and central grant allocation on the size of the French local public sector

The analysis of French municipalities’ public personnel expenditures allows us to study the issue of the size of the local public sector. We concentrate on two paths that French authorities have followed to limit it, i.e., the promotion of inter-municipal cooperation (IMC) and the cut in grants received by municipalities. Our objective is to evaluate their respective role in the evolution of public personnel expenditures at the municipal level, in a context where local politics comes into play. We consider a large panel dataset of municipalities embedded in IMC structures between 2011 and 2018. Our main results, obtained using an original identification strategy, are threefold. We first find evidence that a substitution effect between municipal and IMC personnel expenditures is at work. Second, we find a partisan distorsion through the grant allocation: despite its formula-based definition, aligned and unaligned municipalities are treated differently by the central government. Third, we show that cuts in grants lead to cuts in municipalities’ public wage bills, while partisanship hinders such cuts.     

Grants-in-aid and election outcomes in recipient jurisdictions: The impact of EU funds on mayoral elections in Poland

We analyze the impact of EU funds on the outcomes of Polish mayoral elections in 2010 and 2014. We employ an instrumental variable approach to account for the endogeneity of EU funds. Our instruments approximate the availability of EU funds. The first instrument builds on the alignment of the local electorate with the regional donor government. The second instrument uses the funds spent in municipalities in the same sub-region dropped from the sample because the mayors do not run again. We do not find convincing empirical evidence in favor of the notion that EU funds increase the vote shares of mayors. We go on to test whether the electoral effect of EU funds is conditional on the attitude towards the donor institution among the population in the recipient population. This conditional factor is under-researched and politically virulent – given citizens’ skepticism towards the EU that Krastev (2017) describes for Central and Eastern European EU members. Our results are affirmative. EU funds increase the vote shares of mayors in municipalities where Krastev (2017) predicts the degree of EU skepticism to be low while they are not found to do so in municipalities where EU skepticism is predicted to be widespread. These results suggest that citizens’ attitudes towards the donor of vertical grants determine the political gains of recipients from using them.     

Fiscal Convergence, Business Cycle Volatility, and Growth

This paper analyzes the effects of fiscal convergence on business cycle volatility and growth. Using a panel of 11 EMU and 21 OECD countries and 40 years of data, we find that countries with similar government budget positions tend to have smoother business cycles. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with smoother business cycles. We also find evidence that reduced business cycle volatility through higher fiscal convergence stimulates growth. Our empirical results are economically and statistically significant, and robust.     

More Than You Can Handle: Decentralization and Spending Ability of Peruvian Municipalities

This article builds on a comprehensive dataset for Peru that merges municipal fiscal accounts with information about municipalities’ characteristics such as population, poverty, education, and local politics to analyze the leading factors affecting the ability of municipalities to execute the allocated budget. According to the existing literature and the Peruvian context, we divide these factors into four categories: the budget size and allocation process; local capacity; local needs; and political economy constraints. While we do find that all four factors affect decentralization, the largest determinant of spending ability is the adequacy of the budget with respect to local capacity. The results confirm the need for decentralization to be implemented gradually over time in parallel with strong capacity building efforts.     

Capability and opportunism: Evidence from city officials in China

Opportunism is prevalent in political competition and public policy making. This paper investigates how opportunism is mitigated by capabilities among city leaders in China. Taking advantage of China’s institutional setup with ample bureaucratic transfers, the paper estimates leaders’ capabilities as their personal contributions to local economic growth. The paper finds strong evidence of political business cycles – a typical form of political opportunism – as manifested by a significant boost in the growth rate preceding the Communist Party’s national congress. However, more capable leaders are found to generate more modest political business cycles than less capable ones do. The findings suggest that, to the extent that political selections are associated with the long term reputation of officials, career-concerned opportunism is at least partially moderated by the selection of capable officials in China. The paper provides supportive evidence for the reputation model of political business cycles as well as enriches the study of government officials in weak institutional environments.     

Political budget cycles revisited: Testing the signalling process

A widespread view in the ‘political budget cycles’ literature is that incumbent politicians seek to influence voters’ perceptions of their competence and/or preferences by using the composition of the fiscal budget as a signalling tool. However, little is known about whether voters actually receive and perceive the signal in that way. To empirically assess the relevance of the signalling channel at the municipal level, we conducted a survey among 2000 representative German citizens in 2018. Only a small fraction of voters feel well-informed about the fiscal budget signal and use the information it contains to decide whether to vote for the incumbent politician. Persons paying more attention to the signal sent by local politicians live in smaller municipalities, are more satisfied with their economic situation, are more educated, and do not feel that they are being electorally manipulated. Our analysis raises doubt about the relevance of budget composition as a signalling mechanism for voters at the local level.     

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.