Elections, recession expectations and excessive debt: an unholy trinity

Frank Bohn and Francisco Veiga

Public Choice, 2019, vol. 180, issue 3, No 11, 429-449

Abstract: Abstract In the literature, it has been suggested that political budget cycles are context-conditional, i.e., do not occur in all countries or under all circumstances. What about the underlying economic conditions? It has already has been shown that recessionary expectations reinforce the political budget cycle. This paper argues theoretically that opportunistic policymakers expecting a recession during an election year allow the primary deficit to increase even more when the stock of debt is very high, but reduce the deficit by more during an expected boom (in an election year). For the empirical estimation we use panel data from Portuguese municipalities. Plots of average marginal effects for election years show that differences between high- and low-debt municipalities become more pronounced in stronger expected recessions as well as booms; the stronger effect on the deficit in high-debt municipalities is caused by changes on both the revenue and the expenditure side. A whole armada of robustness tests (non-linear effects, alternative specifications of excessive debt and forecasts, various methods to account for time effects and clustering, several sample restrictions) confirms our results.

Keywords: Political budget cycles; Countercyclical policies; Government deficit; Political opportunism; Local governments; Portugal (search for similar items in EconPapers)
JEL-codes: D72 E32 E62 H62 H63 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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DOI: 10.1007/s11127-019-00647-x

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