Political Implications of Fiscal Performance in OECD Countries

Abstract

While economists argue that lower budget deficits are required in the developed countries, there is a widely held perception that expansionary fiscal policy helps incumbents to get reelected, an assumption that underlies the view that political budget cycles are widespread. However, this view has not been subject to much empirical testing. We examine this argument in a sample of developed countries over the period 1960-2003 and find that increased deficits during an incumbent's term in office, especially in election-years, reduce the probability that a leader is reelected. The effects we find are not only statistically significant, but also quite substantial quantitatively. We also find that voters do not have a systematic preference for expenditure cuts relative to tax hikes or vice versa.

Keywords: political budget cycle, fiscal manipulation

JEL Classification: D72, E62, H62