Do Elections Affect the Composition of Fiscal Policy?

This paper investigates the impact of elections on the level and composition of fiscal instruments using a sample of 19 high-income OECD countries that can be characterized as developed, established democracies during the period 1972-1999. We find that elections shift public spending towards current and away from capital expenditures. Moreover, although we find no evidence for an electoral cycle for government deficit and expenditures, we do find a negative effect of elections on revenue. Our results indicate that the fall in revenue in election periods is attributed to a fall in direct taxation. The decomposition of our electoral dummy suggests that fiscal manipulation seems to be concentrated shortly before the elections. Finally, when we distinguish among predetermined and endogenous elections we find that the above results apply only for the predetermined electoral periods while endogenous elections seem to increase the budget deficit and to leave the composition of fiscal policy unaffected.political budget cycles, elections, composition of fiscal policy, quality of public expenditure

The Impact of Fiscal Policy on Profits

This paper investigates the impact of fiscal policy on profits using panel data for 19 high-income OECD countries during the period 1975-1999. We estimate a profit equation in which profits depend on a set of fiscal variables. Our empirical method is based on a consistent treatment of the government budget constraint, and we try to disentangle the effects of different spending and taxation items. As far as public spending is concerned, our results strongly suggest that capital expenditures are associated with higher profits, while expenditures on wages and salaries deteriorate profits. At the same time our results indicate that transport and communication expenditures increase profits, while the opposite holds for defense expenditures. On the revenue side, both direct and indirect taxation tend to decrease profits. However, a more detailed sub-division of direct taxation indicates that social security contributions have a neutral effect on profits.fiscal policy, profits, quality of public expenditure

Public Investment and Re-election Prospects in Developed Countries

A growing literature suggests that office motivated politicians manipulate fiscal policy instruments in order to seek their re-election. This paper investigates the impact of electoral manipulation of the level and composition of fiscal policy on incumbent’s re-election prospects. This impact is estimated for a panel of 21 OECD countries over the period 1972- 1999. Our results suggest that increased public investment during the term in office, as well as a shift in expenditures towards public investment can improve re-election prospects. On the contrary, election year manipulation via public investment does not affect re-election prospects. We also find that voters punish politicians who create deficits during elections, while deficits that proceed the election year have similar, although smaller effects on the reelection prospects.political budget cycles, elections, quality of public expenditure, public investment

External asymmetries in the euro area and the role of foreign direct investment

A few years after the establishment of the European Economic and Monetary Union (EMU), large asymmetries emerged in the trade balances and the current accounts of the member-states. A divide seems to separate two groups in the euro area, one with the northern countries achieving external surpluses and the other including the southern countries with large external deficits. We argue that a crucial factor in shaping productivity, and consequently affecting competitiveness and the external position of the economy, is the size and composition of Foreign Direct Investment (FDI) and find that the northern countries received more total FDI than the southern group. Moreover, the southern countries attracted more investment in real estate rather than the productive sector. Focusing on ten euro area economies over the period 1980-2009, we establish a positive relationship between FDI flows and trade balances in the northern countries, in contrast to a negative one for the southern group. Using industry-level data, we also establish a positive (negative) long-run relationship between FDI in the manufacturing (non-manufacturing) sector and the trade balance for the northern (southern) countries.Euro area; trade balance; Foreign Direct Investment (FDI)

Democratisation and tax structure: Greece versus Europe from a historical perspective

Building on a unique dataset that contains 13 different tax categories of the Greek state over the period 1833-1933, this paper studies the effect of democratisation on the size and the composition of tax revenues. Empirical analysis suggests that the radical reform that enfranchised all adult males in Greece in 1864 did not affect the level of taxation, but did exert a significant impact on its structure. Universal male suffrage was accompanied by an amazing reduction in rural taxes (e.g., taxes on land) and remarkable increases in indirect taxes – mostly in custom and excises duties. These findings clearly indicate that there were political economy motives behind this shift in the implemented fiscal policy. In particular, the Greek governments changed the structure of taxation in order to satisfy the large majority of the electorate, who were peasants and farmers, ensuring a minimum level of social cohesion. Using also a sample of 12 Western European countries over the same period, we show that the phase of economic development induced a differentiated effect of democratisation on the size and the structure of taxation

Pudding, plague and education: trade and human capital formation in an agrarian economy

During the late 19th century, the increasing popularity of pudding in England, along with the outbreak of phylloxera plague in French vineyards had an unintended effect in the agrarian economy of Greece. In particular, these events escalated the international demand and production of currants in Greece during the 1870s, causing an unprecedented positive shock that was transmitted through trade in the agricultural population. Using novel data from historical archives, we explore how this exogenous event affected investment towards human capital. Consistent with expectations, in an agrarian economy that specializes in unskilled labour-intensive agricultural goods, this shock had a negative effect on human capital formation

Fiscal redistribution around elections when democracy is not "the only game in town"

This paper seeks to examine the implications of policy intervention around elections on income inequality and fiscal redistribution. We first develop a simplified theoretical framework that allows us to examine election-cycle fiscal redistribution programs in the presence of a revolutionary threat from some groups of agents, i.e., when democracy is not “the only game in town”. According to our theoretical analysis, when democracy is not “the only game in town”, incumbents implement redistributive policies not only as a means of improving their reelection prospects, but also in order to signal that “democracy works”, thereby preventing a reversion to an autocratic status quo ante at a time of the current regime’s extreme vulnerability. Subsequently, focusing on 65 developed and developing countries over the 1975–2010 period, we report robust empirical evidence of pre-electoral budgetary manipulation in new democracies. Consistent with our theory, this finding is driven by political instability that induces incumbents to redistribute income—through tax and spending policies—in a relatively broader coalition of voters with the aim of consolidating the vulnerable newly established democratic regime

Δοκίμια στη δημοσιονομική πολιτική

The present thesis is a collection of studies on fiscal policy making. It consists of three chapters. The aim of the thesis is to identify and analyse links between fiscal policy, economic outcomes and elections. In particular, the first chapter attempts to examine the most under-investigated channel of fiscal policy transmission that is the effect of fiscal policy on aggregate profits. The results suggest that both direct and indirect taxation tend to decrease profits, while on the expenditure side results clearly indicate that a rise in public investment will tend to increase profits. The second chapter, using the same set of fiscal variables, explores for a sample of developed and established democracies the possibility of electorally timed shifts in the level and composition of fiscal policy. The results indicate that electoral incentives can affect both the level and the composition of fiscal policy. A key finding is that incumbents try to “signal” their competence by decreasing in election year ‘visible’ government revenues in order to provide immediate economic benefit to voters, while capital expenditures, which may only be observed by voters with a lag, seem to decrease in the election year. Finally, the third chapter examines at the national level the impact of electoral manipulation of public investment and the composition of public spending on the incumbent’s re-election prospects. The empirical evidence shows that the manipulation of public investment around elections is not ‘punished’ at the polls because this cut is not ‘visible’ by voters

Do elections affect the composition of fiscal policy in developed, established democracies?

Political budget cycles, Elections, Composition of fiscal policy, Quality of public expenditure, D72, E62,

Electoral motives and the subnational allocation of foreign aid in sub-Saharan Africa

This paper examines how electoral motives shape the subnational allocation of foreign aid commitments by employing a newly constructed geocoded dataset for 14 sub-Saharan African countries over the period 2000–2012. Our results provide strong evidence of a core voter strategy: African leaders diverting Chinese aid towards regions with a high concentration of political supporters. However, no evidence of such preferential treatment is found for World Bank aid, suggesting that aid from traditional donors is less vulnerable to political manipulation. Our results also reveal that checks and balances in recipient countries are an important mediating factor of aid misallocation: while copartisan regions receive larger amounts of Chinese aid in environments with weak checks and balances, these effects disappear when stronger checks and balances are in place. This paper also offers case study evidence from Ghana. Exploiting the 2009 regime change in Ghana and using a difference-in-differences framework, we provide further support of copartisan targeting and confirm that Chinese aid is more manipulable than World Bank aid in this respect