Electoral economic cycles and the role of political institutions : do political institutions influence the political budget cycle?

Halbeisen, Pascal Hans Ruedi

August 2014

Thesis or dissertation

© 2014 Pascal Hans Ruedi Halbeisen. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.

The Political Budget Cycle describes the repetitive change of fiscal policy by the office holder in order to improve their chances for re-election. This research investigates the connection between the size and type of the Political Budget Cycle and the institutional framework. The empirical analysis examines the influence of individual institutional variables as well as the resulting effect from the overall complexity of the institutional framework.

Analysing the fiscal policy in a panel of 68 developed countries over a period from 1975 until 2009, it is shown that the size of the Political Budget Cycle measured by the budget balance is largely determined by the electoral competition and the concentration of political power. In the absence of a tangible threat of being voted out of office, there is no incentive for the office holder to employ fiscal policy for the purpose of their re-election. In turn, the incumbent’s opportunity to use fiscal policy for their advantage is heavily restricted that in case of dispersed political power. Results reveal further a correlation between the size of the Political Budget Cycle and the political accountability and the mean district magnitude. The significance of their effect, however, is conditional on the concentration of political power. Analysing the existence of electoral fiscal cycles within the budget composition, the research proves conclusively that the type of the Political Budget Cycle and the choice of fiscal instruments is effectively determined by the interaction between the concentration of institutional power and the average district magnitude. The former accounts for the size of the individual electoral cycle whereas the district magnitude determines which fiscal instruments are being utilised. Examining the Political Budget Cycle in a panel of 34 developing countries, the effect of the institutional framework proves to be mostly identical except for the electoral completion. Essentially, the concentration of political power exhibits large explanatory power in justifying for the difference between developed and developing countries. The restricting effect of dispersed political power proves robust when testing in interaction with the age of democracy and the access to free media.

Business School, The University of Hull
Swaray, Raymond
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