Incentive effects of fiscal rules on the finance minister's behavior: Evidence from revenue projections in Swiss Cantons |
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| Institution: | 1. SIM University (UniSIM), Singapore;2. Austrian Institute of Economic Research (WIFO), Vienna, Austria;1. Henan University, School of Economics, Kaifeng, China;2. Halle Institute for Economic Research, Department Macroeconomics, Germany;3. European Central Bank, Directorate Monetary Policy, Sonnemannstr. 20, D-60314 Frankfurt, Germany;1. Poverty Global Practice, The World Bank, 1818 H Street, NW, Washington, DC 20433, USA;2. Research Department, Inter-American Development Bank, 1300 New York Avenue, NW, Washington, DC 20577, USA;3. Department of Economics, Universidad de San Andrés, Vito Dumas 284, B1644BID Victoria, Buenos Aires, Argentina;1. Department of Economics, Bar-Ilan University, 52900 Ramat-Gan, Israel;2. Institute for Applied Microeconomics, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany;1. ADRI-CG, Deakin University, Burwood, Victoria 3125, Australia;2. Department of Economics, Monash University, Caulfield East, Victoria 3145, Australia;1. Dipartimento di Economia, Management e Metodi Quantitativi, Università Statale di Milano, Via Conservatorio 7, 20122 Milano, Italy;2. Dipartimento di Scienze Politiche e Sociali, Università degli Studi di Pavia, Corso Strada Nuova 65, 27100 Pavia, Italy |
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| Abstract: | Predicting available tax revenue accurately is a key step of fiscal policy. It has recently been shown that revenue projection errors have a direct impact on fiscal deficits. In this paper, we explore the relationship between the ideology of the finance minister and tax revenue projection errors, and assess how the stringency of fiscal rules alters this relationship. We use a panel dataset of 26 Swiss cantons over the period 1980–2007 as well as a new dataset of 99 finance ministers at the cantonal level. Our empirical strategy exploits the fact that the allocation of the departments – including the department of finance – to the elected politicians is a random process from the point of view of the voters. We identify a rather counter-intuitive positive effect of the ideology of the finance minister on tax revenue projection errors in the sense that a more left-wing finance minister produces relatively more conservative forecasts. We also find that fiscal rules reduce the effect of ideology on tax revenue projection errors. These results suggest that left-wing finance ministers need to curb deficits relatively more in order to signal the same level of competence to the voters than right-wing finance ministers. They also suggest that fiscal rules render the signal less informative to the voters and thereby reduce the incentive for left-wing finance ministers to be more conservative in their projections. |
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