Political Budget Cycles in the European Union: New Evidence of Fragmentation

Milan Bednař ()
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Milan Bednař: University of Economics, Prague, Czech Republic

Acta Oeconomica, 2019, vol. 69, issue 4, 523-547

Abstract: This paper deals with the possible existence of political budget cycles (PBCs) within the European Union (EU). I use panel data for 28 EU countries from 1995 to 2016 and provide estimates based on dynamic panel regressions. I employ a system-GMM estimator complemented by the Principal Component Analysis (PCA) to limit the number of instruments. The specifications include structural budget balances related to the potential GDP, thereby limiting the initial endogeneity. These measures capture the true motivation behind fiscal policies. The results suggest that the EU member states exhibit PBCs: (i) the intervention occurs in the year before elections and (ii) the structural budget balance to the potential GDP ratio is lower by –0.41 percentage points a year before elections. In addition, I have investigated the EU fragmentation in terms of the PBCs and selected 8 countries’ characteristics correlating to the existence of these cycles. These include lower GDP per capita, post-communist background, low tax burden, high perceived corruption, low levels of media freedom and internet usage, lower number of directly voted-in legislative officials, and a low parliamentary voter turnout.

Keywords: political budget cycles; fiscal policy; elections; European Union; dynamic panel estimation (search for similar items in EconPapers)
JEL-codes: C33 E62 P16 (search for similar items in EconPapers)
Date: 2019
Note: The author would like to thank the two anonymous reviewers for their valuable comments.
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