Disentangling political and institutional determinants of budget forecast errors: A comparative approach

Boukari, Mamadou; Veiga, Francisco José

doi:10.1016/j.jce.2018.03.002

Cited by 18 publications

(27 citation statements)

References 50 publications

(75 reference statements)

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“…underestimates the budget balance) in order to show its competence by being able to do unexpected expansionary fiscal policies. The former view is supported, for instance, by Boylan [45] with respect to optimistic revenue forecasts in US states from 1988 to 2004; by Heinemann [46] with respect to optimistic deficit forecasts for Germany’s federal budget from 1969 to 2003; and, more recently, by Boukari and Veiga [47] with respect to optimistic budget forecasts (both revenue and expenditures) in France and Portugal from 1998-2015. Brück and Stephan [48] posit that the Stability and Growth Pact may actually have spurred forecast optimism in the eurozone.…”

Section: Methodsmentioning

confidence: 97%

Political cycles: Beyond rational expectations

Bohn

2018

PLoS ONE

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Motivation and methodExisting rational expectations models cannot satisfactorily explain why political budget manipulations systematically raise re-election chances and only occur in “specific contexts”. This paper offers a theoretical explanation by including unsophisticated voters into an opportunistic political cycle model; unsophisticated voters are unable to take the optimal behaviour of other agents (fully) into account, but may, nonetheless, vaguely suspect government deception.ResultsFirst, rationally expected manipulations are, on average, fruitless in equilibrium. By including unsophisticated voters we can, however, corroborate empirically found electoral effects of political budget manipulations. Second, unsophisticated voters become anxious and suspicious in an intransparent or uncertain world, but the government tries to “outperform” their scepticism by increasing budget manipulations in order to appear more competent and, ultimately, increase re-election chances. It is, therefore, not surprising that political budget cycles are observed in countries suffering from intransparencies such as developing countries or new democracies. Third and in addition, the model presented here predicts that political opportunism produces, unintentionally, a countercyclical policy effect in election years, thereby, for instance, alleviating the typical problem of policy procyclicality in developing countries.Additional contributionThe paper also offers a theoretical explanation for political distortions found in forecasts by US states. Based on overly optimistic revenue forecasts the incumbent state government can conduct expansionary fiscal policies in order to appear more competent prior to an upcoming election. Since the resulting deficit can only be observed afterwards, the government can effectively circumvent a constitutional balanced budget constraint. As a result, there are political forecast and budget cycles in the state. More generally, however, these findings may also apply to European countries where balanced budget constraints are or will be in place (for instance the debt brakes in Switzerland and Germany); similarly, they apply to the supra-national European Fiscal Compact of the European Union.

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Section: Methodsmentioning

confidence: 97%

Political cycles: Beyond rational expectations

Bohn

2018

PLoS ONE

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“…For example, Boylan (2008) finds an important political influence: budgets in the year ending right before an election or starting before an election tend to be based on optimistic forecasts. Likewise, comparing French and Portuguese local governments, Boukari and Veiga (2019) find that budget forecasts are biased (though seem to have been more cautious in French departments than in Portuguese municipalities). They also find that these biases are essentially driven by electoral motivations and institutional differences.…”

Section: Name This As 'Political Forecastmentioning

confidence: 95%

“…French and Portuguese local governments, Boukari and Veiga (2019) find that budget forecasts are biased (though seem to have been more cautious in French departments than in Portuguese municipalities). They also find that these biases are essentially driven by electoral motivations and institutional differences.…”

Section: Introductionmentioning

confidence: 93%

“…Several studies find evidence giving support to the 'Political Forecast Cycle' hypothesis (Boylan, 2008;Bischoff and Gohout, 2010;Anessi-Pessina and Sicilia, 2015;Boukari and Veiga, 2019). For example, Boylan (2008) finds an important political influence: budgets in the year ending right before an election or starting before an election tend to be based on optimistic forecasts.…”

Section: Name This As 'Political Forecastmentioning

confidence: 99%

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Fiscal forecast manipulations and electoral results: evidence from Portuguese municipalities

Boukari

Veiga

2021

Journal of Public Finance and Public Choice

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This article aims to evaluate the impact of budget forecast manipulations on election results using a sample that covers all 308 Portuguese municipalities over the period running from 1998 to 2017. The results reveal that incumbent mayors overestimate revenues and expenditures. Overstating the budget more on the revenue side, they end up with a deficit. We check if this opportunistic behaviour is electorally beneficial. The results provide little or no evidence that election-year manipulations of revenue forecasts affect the vote shares of the party of the incumbent mayor. On the other hand, the opportunistic management of total and capital expenditure forecasts pays off, which is consistent with previous results for Portugal indicating that increased total and, mainly, capital expenditures lead to higher vote shares.

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“…1 Fiscal rules have been often evoked as a useful tool to curb fiscal indiscipline, especially of local authorities, and to prevent biased budget estimates that are responsible for excessive deficit (Von Hagen and Harden, 1994;Alesina and Perotti, 1996;Frankel, 2011;Chatagny and Soguel, 2012;Frankel and Schreger, 2013). Systematic biased formulation of fiscal variables has indeed important drawbacks in the creation of structural deficit and public debt accumulation to the detriment of local welfare (Boukari and Veiga, 2018) and long-term national fiscal sustainability. However, fiscal rules have been accused of forcing discretionary pro-cyclical fiscal policy (Marinheiro, 2008) and creating "window dressing" measures (Milesi-Ferretti, 2004;Balduzzi and Grembi, 2011) and excessive optimism in official budget forecasts (Frankel, 2011;Frankel and Schreger, 2013), especially in the run-up to elections (Brück and Stephan, 2006;Pina and Venes, 2011).…”

Section: Introductionmentioning

confidence: 99%

Fiscal rules and budget forecast errors of Italian municipalities

Picchio

Santolini

2020

European Journal of Political Economy

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We study the impact of the domestic stability pact on the budget forecast errors of Italian municipalities. The 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 less than 5,000 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. Revenue (expenditure) forecast errors for municipalities below 5,000 inhabitants became indeed 26% (22%) larger than in the past.

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Disentangling political and institutional determinants of budget forecast errors: A comparative approach

Cited by 18 publications

References 50 publications

Political cycles: Beyond rational expectations

Political cycles: Beyond rational expectations

Fiscal forecast manipulations and electoral results: evidence from Portuguese municipalities

Fiscal rules and budget forecast errors of Italian municipalities

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