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The political economy of fiscal supervision and budget deficits: Evidence from Germany

Felix Roesel ()

No 02/17, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)

Abstract: In many federal countries, local governments run large deficits, even when fiscal supervision by state authorities is tight. I investigate to which extent party alignment of governments and fiscal supervisors influences budget deficits. The dataset includes 427 German local governments for the period 2000-2004. I exploit a period after a far-reaching institutional reform that entirely re-distributed political powers on both the government level and the fiscal supervisor level. Results do not show that party alignments of governments and supervisors (co-partisanship) drive short-term deficits. Instead, I find that the ideology of partisan governments and supervisors matters: left-wing local governments run higher deficits than their right-wing counterparts; left-wing supervisors tolerate higher deficits than right-wing supervisors. These findings imply that political independence for fiscal supervisors is recommended.

Keywords: Local government; Budget deficits; Fiscal supervision; Partisan cycle (search for similar items in EconPapers)
JEL-codes: H62 H74 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe, nep-pol and nep-ure
Date: 2017
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Journal Article: The Political Economy of Fiscal Supervision and Budget Deficits: Evidence from Germany (2017) Downloads
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