Transparency, Political Polarization, and Political Budget Cycles in OECD Countries

Abstract

T his article examines whether and how institutional transparency and the polarization of political parties affect the scope for electoral cycles in fiscal policy. We show how access to information about fiscal policy matters for the existence of electoral cycles in public finances. Conditioning on the degree of fiscal policy transparency, we find that cycles are present in a sample of 19 advanced industrialized OECD economies, all fully developed and by no means recent democracies. We also find, consistent with the same theory, that electoral cycles are larger in more politically polarized countries. We thus provide evidence that electoral cycles in fiscal policy are not a phenomenon confined to or driven by weaker and newer democracies.Interest in the political business cycle, deliberate manipulation of economic policy instruments or outcomes in the vicinity of elections, is persistent. Originating with work on electoral cycles in unemployment and real income in the 1970s, many economists and political scientists investigated theoretical foundations for and empirical implications of the political business cycle. Evidence was mixed, and conclusions differed. Alesina, Roubini, and Cohen (1997) found post-election cycles in many James E. Alt is Frank G. Thomson professor of government, Harvard University,

Business taxes and the electoral cycle

“…In particular after the set-up of the European Monetary Union members of the Eurozone have systematically run fiscal expansions during election years (Buti and van den Noord, 2003;von Hagen, 2006;Mink and de Haan, 2005;Efthyvoulou, 2012). Similar evidence for an effect of elections on debt in OECD countries is found by Alt and Dreyer Lassen (2006). 2 Using data collected at the country level obviously has a number of limitations, first and foremost that it commonly does not allow to perfectly control for all other institutional and monetary differences across countries.…”

Political budget cycles and election outcomes

“…Also the findings for the second stage regression for votes received by political parties do not change much (all results are available upon request). 24 Next, earlier studies of the existence of political budget cycles point out that electoral budgetary policies are stronger when politicians are less credible and fiscal policy is less transparent (Alt and Lassen 2006;Keefer and Vlaicu 2008). To examine whether this notion affects our results, we split our sample into two equal-sized groups based on the level of governance.…”

“…The larger is the number of voters that fail (ex ante) to distinguish electionmotivated fiscal policy manipulations from incumbent competence, the more the incumbent profits from boosting expenditures before an election. Alt and Lassen (2006) argue that the greater is the transparency of the political process, the lower is the probability that politicians behave opportunistically. Eslava (2006, 2010) explain the relationship between opportunistic spending of the government and the election outcome within a game theoretic framework.…”

Electoral Confidence and Political Budget Cycles in Non-OECD Countries

“…Yet evidence of PBCs is mixed. Alesina, Cohen, and Roubini (1992;1997), and Alt and Lassen (2006) have found PBCs in OECD countries, while Schuknecht (1996Schuknecht ( , 1999 has found PBCs in developing countries. Vergne (2009) has also found PBCs in developing countries but only in certain types of spending.…”

“…7 Others have suggested that democratization reduces this ability, pointing to democratic stability (Adi Brender & Drazen, 2007;A. Brender & Drazen, 2005), voter experience (Akhmedov & Zhuravskaya, 2004;Shi & Svensson, 2006), party institutionalization (Shelton, n.d.), and fiscal transparency (Alt & Lassen, 2006).…”