Focusing on Low-Income Countries, we investigate the behavior of fiscal variables during and after elections. The results indicate that during election years, government consumption significantly increases and leads to higher fiscal deficits. During the two years following elections, the fiscal adjustment takes the form of increased revenue mobilization in trade taxes and cuts to government investment, with no significant cuts in government consumption. Using a new dataset on national fiscal rules and IMF programs, we find that both the presence of fiscal rules and IMF programs help dampen the magnitude of the political budget cycle in LICs. We conclude that elections not only imply a macroeconomic cost when they take place but also trigger a painful fiscal adjustment in which public investment is largely sacrificed.
We examine electoral cycles in tax reforms using monthly data over the period of 1990-2018 for 22 advanced economies and emerging markets. We show that governments tend to avoid announcing tax reforms during the months running up to elections. In addition, they become more likely to announce those reforms in the first few months following elections, indicating that “political capital” plays a role in the timing of reforms. These patterns are broad-based regarding the changes in tax base and rate, and for various types of taxes. We also find that the pre-election decrease in the likelihood of tax reform announcements is stronger in emerging markets, and weaker in the countries with relatively better institutional quality. Finally, our results indicate that neither fiscal rules nor IMF programs appear to have differential effects on electoral cycles in tax reforms.
election in LICs. Several fiscal outcomes (government consumption, public investment, breakdown of tax revenues, and budget balance as percentage of GDP) are used to assess the magnitude of the shocks on the budget during and after elections. The section also discusses the baseline econometric results.
Baseline Specification and Data
This chapter estimates several dynamic panel equations linking a given fiscal outcome with the electiondummy while controlling for standard determinants of the given fiscal variable. As has now become standard in the literature on
= 1, 2). Additional covariates X it include mayor’s characteristics (gender, age, education, party affiliation, ideological stance), total per capita transfers received by municipalities, the proportion of people ages 15–64 years, and taxable per capita income, while μ i and λ t are municipality fixed effects and year effects, respectively. 10
Table 13.2 reports the estimates at the 5,000-inhabitant threshold of the political budget cycle effect (the α 0 coefficient of the electiondummy W it ) and the fiscal rule effect on the political budget cycle (the
—Public Investment on Output
D. The Impact of Growth on Public Investment
E. The Impact of Public Investment and Growth on the Bilateral RER
F. Effects of Natural Disaster and Elections
1. ECCU: Rate of Return on Public Investment
2. ECCU: Rate of Return Compared
I. ECCU Public Investment Model: Summary Statistics
II. Correlation Matrix of Model Variables
III. VAR Coefficients on Natural Disaster and ElectionDummy Variables
1. ECCU: Public Investment, Growth and Aid Inflows, 1975–2004
2. ECCU: Public Sector
Miss Anna R Bordon, Mr. Christian H Ebeke, and Ms. Kazuko Shirono
Structural reforms are expected to lift growth and employment, but their effects are surprisingly difficult to pin down empirically. One reason is their potential endogeneity to the economic environment in which they are conducted. For example, the impact of a reform implemented shortly before a cyclical upswing is difficult to distinguish from the recovery itself. Similarly, macroeconomic policies conducted along a structural reform could affect the estimated impact. Exploring various options, this paper develops robust estimates of the impact of labor and product market reforms by using local projection techniques while controlling for endogeneity of reforms and other biases. The results suggest that labor and product market reforms have a lagged but positive impact on employment creation, and the positive effect remains even after controlling for the endogeneity of the decision to reform. Supportive macroeconomic policies are found to increase the effect of labor and product market reforms, consistent with the view that some structural reforms are best initiated in conjunction with supportive fiscal or monetary policy.
Mar Delgado-Téllez, Victor Duarte Lledo, and Javier J. Pérez
This paper proposes an empirical framework that distinguishes voluntary from involuntary compliance with fiscal deficit targets on the basis of economic, institutional, and political factors. The framework is applied to Spain’s Autonomous Communities (regions) over the period 2002-2015. Fiscal noncompliance among Spain’s regions has shown to be persistent. It increases with the size of growth forecast errors and the extent to which fiscal targets are tightened, factors not fully under the control of regional governments. Non-compliance also tends to increase during election years, when vertical fiscal imbalances accentuate, and market financing costs subside. Strong fiscal rules have not shown any significant impact in containing fiscal non-compliance. Reducing fiscal non-compliance in multilevel governance systems such as the one in Spain requires a comprehensive assessment of intergovernmental fiscal arrangements that looks beyond rules-based frameworks by ensuring enforcement procedures are politically credible.