Strategic Borrowing in Competitive Elections

28 Pages Posted: 21 Sep 2009 Last revised: 20 Jan 2010

Date Written: September 21, 2009

Abstract

This article examines the effect of a government's popularity on its incentives to increase the budget deficit before an election. It thus adds further insights to an expanding literature on context-conditional political budget cycles, i.e. pre-election dynamics in the budget balance under different political, economic, and institutional settings. In particular, the article refines previous analyses with a similar emphasis, arbitrates between competing theoretical models of political budget cycles, and integrates hitherto separate theories in a unified model predicting the impact of government popularity on the magnitude of electorally motivated deficits. The main substantive result is that party polarisation mediates the relationship between government popularity and the deficit. When polarisation is low, the effect is parabolic with the maximum occurring at the point where the election is neck-on-neck. As polarisation increases, the effect approaches linearity where a lower popularity implies a higher deficit. This result is underpinned by an empirical investigation of 19 OECD countries.

Keywords: Political budget cycles, Vote intention, Developed democracies

JEL Classification: D72, E62, D78

Suggested Citation

Hanusch, Marek, Strategic Borrowing in Competitive Elections (September 21, 2009). Available at SSRN: https://ssrn.com/abstract=1476432 or http://dx.doi.org/10.2139/ssrn.1476432

Marek Hanusch (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom