Party Alignment, Political Budget Cycles and Vote within a Federal Country

Abstract

We first study theoretically how intergovernmental relations affect political budget cycles (PBCs) within federal countries, introducing a national incumbent that favors aligned districts in a model where discretionary fiscal policy is subject to credibility problems. Then we analyze Argentina’s provinces during the 1985–2001 period. Unsurprisingly, aligned provinces where the governor belongs to the president’s party receive larger federal transfers (and have larger public expenditures) during the governor’s entire term, while provincial budget balances worsen in electoral years. We uncover an interaction effect by which unaligned provinces tend to worsen their budget balances more in electoral years. The sharpest result is that larger average federal transfers boost the vote for aligned governors. Two broad implications are that studies of subnational PBCs are biased by an omitted factor (discretional federal transfers), and governors unaffiliated with the president suffer a “Cinderella” effect at the polls which helps the president dominate national politics.

Keywords: federal countries, discretional transfers, party alignment, distributive politics, subnational political budget cycles

JEL Classification: D72, E62