Inequality, Political Systems and Public Spending

Abstract

Political regimes and institutions di®er across countries. Such char- acteristics in°uence public spending within each country. The aim of this paper is to check for the existence of a link between political institu- tions, income inequality and public spending. We develop an empirical investigation, based on panel data analysis, on the determinants of pub- lic spending focusing on political, economic, demographic and social variables in large sample of developed and developing countries from 1970 to 2005. In particular, we focus on the e®ects of electoral rules on government consumption ¯nding that in countries with proportional electoral rule an increase in the heterogeneity of the government in- creases government consumption, while in countries with majoriratian electoral rule, a shift from presidential to parliamentary system leads to an increase in government consumption. We ¯nd that the link between income distribution, measured by the Gini index, and public spending depends upon institutional characteristics. Moreover, we ¯nd empiri- cal support for the argument that government spending is a policy tool used by governments to insurance the domestic economy from external shocks stemming from international trade.