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date: 20 September 2017

Political Budget Cycles

Summary and Keywords

The political budget cycle—how elections affect government fiscal policy—is one of the most studied subjects in political economy and political science. The key theoretical question is whether incumbent governments can time or structure public finances in ways that improve their chances of reelection; the key empirical question is whether this in fact happens. The incentives of incumbents to engage in such electioneering are governed by political institutions, observability of political choices, and their consequences, as well as voter knowledge, and both theoretical and empirical studies on political budget cycles have recently focused on conditions under which such cycles are likely to obtain. Much recent research focuses on subnational settings, allowing comparisons of governments in similar institutional environments, and a consensus on the presences of cycles in public finances—and in the reporting of public finances—is beginning to emerge.

Keywords: political budget cycles, political business cycles, elections, political economy, fiscal policy

Introduction

The political budget cycle—how elections affect economic policies and outcomes—is one of the most studied topics in political economy and political science. This article provides an overview of the political science and political economy studies on political budget cycles, with an emphasis on recent work and research approaches.

While the theoretical foundations of political cycles can be quite complicated, the intuition is fairly simple: An incumbent government can find it in its own self-interest to undertake actions or policies shortly before elections, with the sole goal of improving its chances for reelection, including policies that promote short-term decreases in employment and higher gross domestic product (GDP) growth—as in the case of political business cycles—and lower taxes, higher public spending, or a combination thereof—as in the case of political budget cycles.1 This will distort politicians’ decisions in election or preelection years.2 Empirically, the investigation of electoral cycles is based on the premise that elections and specific policy choices and outcomes should coincide only by chance, the argument being that decisions about optimal economic policy are rarely, if ever, affected by elections. Despite the fact that the idea of the political business cycle dates back at least 40 years, to Nordhaus’s 1975 seminal paper, much of the empirical literature continues to be based on this basic intuition, even if complicated by concerns about endogenous election timing and the need for different policies due to private-sector uncertainty, both of which we return to later in this article.

Clarifications and Terminology

The terms political business cycle and political budget cycle are sometimes used interchangeably, but they mean different things. Political business cycles and political budget cycles are distinguished by their objects or dependent variables of interest, as the former typically concerns macroeconomic variables such as inflation and GDP growth, while the latter concerns public finance variables such as public deficits, spending, and taxation, which governments enjoy more direct control over. The term political cycle can also mean different things. Sometimes, as will be the case in this review, the term covers electoral or opportunistic cycles; i.e., how elections alter government behavior and public policy and how policies change over the course of the electoral cycle. However, occasionally it also covers so-called partisan cycles, which concern how incumbent governments with different political ideology vary in their policies (including, for example, how monetary and fiscal policy differ between right-wing and left-wing governments). Examples of works that cover both electoral and partisan cycles include Alesina, Roubini, and Cohen (1997) and Franzese (2002). However, in this review, we will focus exclusively on electoral cycles, with an emphasis on budget cycles.

Structure of the Review

The amount of both published and unpublished articles and manuscripts within this area is remarkable,3 rendering a complete overview of political budget cycles infeasible. At the same time, however, this paper is by no means the first attempt at reviewing the existing theoretical and empirical literature on political business and budget cycles in political science and political economy. A selection of reviews include Drazen (2000), who provides a comprehensive survey of political business cycles and in many ways turns the page from business to budget cycles. Almost at the same time, and writing from the political science perspective, Franzese (2002) provides an early, comprehensive review of—and in some ways manifest for—conditional political budget cycles, the idea (which we review in detail next), that political cycles are more likely to exist in some settings than in others. Alt and Rose (2007) pick up where Franzese left and provide additional empirical evidence, as do de Haan and Klomp (2013). Currently, Dubois (2016) is the most recent review article about political cycles, while Alesina and Passalacqua (6) connect the literature on political budget cycles to the more general literature on the political economy of government debt.

Our review will mainly focus on recent developments, and readers interested in the evolution of the historical thinking on political cycles, both business and budget, should begin with Drazen (2000) and continue with the abovementioned surveys. We aim to provide readers with an overview of the most important theoretical and empirical contributions to the field, as well as a feeling for current issues within the political budget cycle literature, including a focus on subnational governments and work on electoral cycles in the manipulation of government data.

While the main scope of our survey is political budget cycles, we begin by providing a brief account of the scholarship on political business cycles, which serves as the foundation on which the literature on political budget cycles is built.

Prelude: The Political Business Cycle

The idea of manipulating the economy for electoral gain dates to Kalecki (1943) and Schumpeter (1939), but the modern take on political business cycles started with Nordhaus (1975). The early empirical evidence for an effect of the electoral calendar on economic variables was, however, generally mixed. In one of the earliest comparative empirical studies of political cycles, Paldam (1979) finds weak evidence of an overall cycle in economic variables and no evidence of a general election year expansion, as real growth appears strongest in the second year of the electoral calendar. Beck (1982), in a study of unemployment and inflation in the United States between 1961 and 1973, finds no evidence of a political business cycles in these two policy measures, and in an early verdict of the nascent literature, Alt and Chrystal (1983, p. 125) notes that “no one could read the political business cycle literature without being struck by the lack of supportive evidence.”

At the same time, belief in the ability of governments to fine-tune the economy, and thus also for electoral purposes, was receding; this accompanied, and was accompanied by, theoretical arguments and policy changes that, for example, restricted political discretion over monetary policy, which was instead left to more or less independent central banks (e.g., Barro & Gordon, 1983). Concurrent with this, theoretical work, summarized in Lohmann (1998), clarified the importance of adaptive versus rational expectations and the structure of informational asymmetries for political business cycles.

Partly as a result of the early literature’s weak empirical results, especially with regard to GDP expansion and monetary policy, focus eventually turned to fiscal policy or other economic levers that the government could actually pull, as also suggested by Drazen (2000, p. 114); this work is reviewed separately later in this article. The turn toward political budget cycles does not mean, however, that the political business cycle can be written off entirely.

Recent Advances in the Study of Political Business Cycles: Conditional Cycles, Private-Sector Behavior, and Endogeneity of Elections

Recent literature has worked on clarifying the theoretical assumptions of political business cycles and on linking theory and empirical implications with regard to macroeconomic factors more closely. Early work on the occurrence of political business cycles generally assumed that policymakers would both be able to influence business cycles and have the incentive to do so without giving much attention to institutional and political factors. However, it would be very plausible that both the ability of and incentive for incumbent governments to engineer business cycle fluctuations according to the electoral calendar would be contingent on factors such as monetary institutions, including the independence of central banks (Drazen, 2000, p. 80), and various political-institutional factors. Consequently, later parts of the literature on political business cycles, especially within political science, have tried to assess the influence of these factors on the existence and scope of political business cycles. This includes Clark and Hallerberg’s (2000) study of political cycles in countries in the Organisation for Economic Co-operation and Development (OECD). They argue, based on the assumption of mobile capital, that the occurrence of political budget cycles, both in money supply and fiscal policy, depend on the level of central bank independence and the exchange rate regime, and they find that cycles in money supply due to electoral concerns mainly happen under low central bank independence and a flexible exchange rate regime.

Most of the empirical studies of political business cycles that use GDP as the dependent variable of interest rest implicitly on the assumption that upcoming elections affect only government behavior. However, Canes-Wrone and Park (2012) make an argument of potentially great importance for the empirical study of political business cycles. Based on a framework of economic uncertainty, they argue that politically polarized and close elections induce private businesses and households to postpone fixed investments due to political uncertainty. In turn, these delayed investments cause—ceteris paribus—a temporary drop in GDP. Quarterly data from 10 OECD countries in the years 1975–2006 provide substantial evidence in favor of this argument. Furthermore, considering GDP net of private investment, their results robustly show an expansion of GDP in preelection quarters. In other words, electorally induced decisions in the private and public sectors may offset each other and, accounting for this, there is considerable evidence for the occurrence of a political business cycle in the components of GDP that governments can affect. Apparently, the factors associated with a greater government incentive to generate political business cycles, such as close and politically polarized elections, are also associated with less private, fixed investments, which, everything else equal, yields a temporary drop in GDP. The findings provide a potential explanation for lack of a detectable election-year economic expansion in earlier studies, as government economic manipulation is potentially hard to identify by looking at aggregate economic statistics, since elections also affect nongovernment contributions to economic fundamentals.

The findings of Canes-Wrone and Park (2012) speak to the larger research agenda on policy uncertainty and its effect on the real economy.4 In another study of policy uncertainty in the United States, they find evidence that both housing sales and house prices decline in years of competitive gubernatorial elections (Canes-Wrone & Park, 2014), which is another indication of an election-year uncertainty effect in private investment and potentially durable consumption. Very recent scholarship on private investment and consumption in election years (Canes-Wrone & de Leon, 2015) suggests that the reverse business cycle is also contingent on political development. They find that among non-OECD countries with competitive elections, private fixed investment declines in election years, but that the effect decreases with the level of democracy, which they interpret as the effect of increased level of executive constraint and increased freedom and availability of information. Among the usually democratic consolidated OECD countries, they find that elections also cause a decrease in private fixed investment, but only for relatively close elections. The consumption of nondurable goods follows the opposite pattern of private fixed investment, suggesting that the consumption of nondurables increases with electoral uncertainty.

In sum, the insight that elections might also in some circumstance cause a temporary drop in GDP due to political uncertainty suggests that many previous studies might have underestimated government economic manipulation before elections.

The early literature on political cycles took for granted that election dates are fixed, as is the case of the United States, where the inspiration for Nordhaus’s original theory originated, and which was the basis of many early empirical studies in the literature. However, in many systems, especially parliamentary ones, the incumbent government can dissolve parliament and thus call elections early,5 although the exact dissolution power varies significantly among countries and for countries over time (Goplerod & Schleiter, 2016). Instead of manipulating the economy and policy measures, these systems allow the government to choose times of favorable economic conditions and popularity to call for elections. The government can thus engage in so-called electoral surfing, rather than electoral manipulation turning the phenomenon of electoral cycles on its head.

The literature on this phenomenon started with studies showing that Japanese (Ito, 1990; Cargill & Hutchinson, 1991) and Indian (Chowdhury, 1991) governments in the postwar period had relied on opportunistic electoral calling or electoral surfing, rather than macroeconomic manipulation. Early research on electoral surfing for other developed democracies either found little (Alesina, Roubini, & Cohen, 1993) or some (Palmer & Whitten, 2000) evidence for the occurrence of opportunistic election calling. Kayser (2005) develops a formal model for when governments will choose to call early elections and when they manipulate the economy. The model’s prediction is that the chance of surfing will increase with electoral uncertainty, while the value of office holding will increase the chance of electoral manipulation. Recent empirical studies of the determinants of early elections include Kayser (2006) and Riero (2015).6

The endogeneity of elections thus constitutes a potential challenge for empirically detecting especially political business cycles. Scholars of political cycles in general now increasingly distinguish between early and scheduled elections in their empirical specifications; see Brender and Drazen (2005), Katsimi and Sarantides (2012), and Reischmann (6) for examples.

The Political Budget Cycle

While political business cycles concern macroeconomic factors, the political budget cycle concerns fiscal policy. As mentioned in the beginning of this review, the basic intuition of political budget cycles is that an incumbent government will increase public spending and/or decrease taxation just before elections, which will presumably cause higher public deficits in the year of and/or the year before an election. Alesina (1988) cites Kenneth Rogoff’s 1987 working paper version of his eventual article on equilibrium political budget cycles (Rogoff, 1990) for what seems to be the first use of the term political budget cycle. At the same time, he cites empirical evidence from Tufte (1978) that, in the case of the United States between 1960 and 1976, “personal transfers” were usually increased in the months immediately preceding the November elections, an observation that, as noted also by Franzese (2002), seems to be the first explicit mention of what we eventually have come to call the “political budget cycles.” Alesina (1988) concludes that “the evidence discussed by Tufte [… is], broadly speaking, consistent with a ‘political budget cycle’ on personal transfers. Needless to say, ‘political budget cycles’ could be observed on many other variables, such as other types of government expenditures or prices of public services.” This prediction turned out to be true.

The early political economy literature on political budget cycles was generally centered around a number of formal theoretical models. Rogoff’s original political agency model, and the precursor of Rogoff and Sibert (1988), was one of adverse selection—that is, politicians could be more or less proficient in delivering public goods and would engage in signaling through fiscal policy to communicate their type to voters before elections. Lohmann’s (1998) model, while focused on political business cycles, made away with the argument that politicians know their own type, which transforms the complicated adverse selection model into a more manageable career-concerns model, without losing much in terms of incentives for strategic electioneering.

Persson and Tabellini’s (2000) textbook treatment basically combined Lohmann’s career concerns model with the public finance setting of Rogoff, making it a workhorse model for studies of conditional political budget cycles, used to study, among other issues, electoral institutions (Persson & Tabellini, 2003a, 2003b), voter information (Shi & Svensson, 2006), and political polarization (Alt & Lassen, 2006a, 2006b). This class of models includes a moral hazard dimension, as the incumbent (the agent) can take imperfectly observable decisions with the aim of enjoying office rents if elected at the cost of taxpayers (the principals).

One thing to note: Studies of political budget cycles typically, almost by definition, assume the presence of electoral democracy. However, budget cycles have been detected even in nondemocratic settings: Guo (2009) finds evidence that Chinese counties’ spending grows more in the years in which county chief executives are more likely to be considered for a promotion, while Blaydes (2011) finds evidence of political budget cycles in Egypt under dictator Hosni Mubarak, and Higashijima (2016) provides a recent account of political budget cycles during dictatorships.

Conditional Budget Cycles

While the early empirical studies of the occurrence of political budget cycles found some evidence of election- or preelection-year fiscal expansion, the effect was generally modest, especially in developed countries (Alesina, Roubini, & Cohen 1997; Drazen, 2000, pp. 95–99). As noted by Franzese (2002, p. 370), echoing Tufte (1978), such mixed and occasionally conflicting evidence could reflect that the incentives and opportunities for engineering cycles in government finances could well depend on the “institutional, structural, and strategic contexts in which elected, partisan incumbents make policy.” Consequently, taking off in the early 2000s, the focus of the study of political budget cycles changed from looking at the raw occurrence of electorally induced fiscal expansions into examining whether different structural, institutional, and political factors limit or increase the likelihood and/or size of political budget cycles. This continuing research agenda has resulted in a variety of theoretical and empirical articles, which look at various conditional factors for political budget cycles.

The different conditional factors relate both to the incumbent’s incentive to generate the political budget cycles and the extent to which they are detectable by the public; i.e., whether the public can recognize an underlying economic rationale for the policy or whether it can be detected as an opportunistic, electorally motivated policy. In one of the most cited recent papers on political budget cycles, Shi and Svensson (2006) focus on voters’ information level and the value of holding office for the incumbent government in an empirical study of political budget cycles, motivated by a career-concerns style theoretical model. Based on the finding that political budget cycles seem to be greater in less politically developed countries, they argue that political budget cycles decrease as voters have access to more information, and increase as the government’s ability to gain rents from office increases. This framework, closely related to the model in Persson and Tabellini (2000), forms the theoretical basis of large parts of the subsequent empirical literature on conditional budget cycles, where the focus is often on factors that either give voters more potential information about government manipulation or alter the value of holding office, broadly construed.

Regarding both office-holding value and voter information, Alt and Lassen (2006a, 2006b) focus on political polarization and fiscal transparency, respectively. Fiscal transparency has been a central point of public sector governance reforms since the early 1990s, most recently accentuated by the sovereign debt crisis in Europe; and worldwide efforts to map and understand patterns of differences in fiscal transparency (de Renzio & Wehner, 2013) show wide variation in the amount of information about fiscal and government policy that reaches voters, the media, and opposition political parties. Fiscal transparency, by enabling voters to infer incumbent type and actions with greater precision, decreases expected benefits of preelectoral manipulation of public finances. Empirically, this is confirmed by observing smaller political budget cycles in more transparent regimes across OECD countries (Alt & Lassen, 2006b) and, for a different sample and time period, in European Union (EU) countries (Alt, Lassen, & Wehner, 2014).

Political polarization, instead, increases the value of holding office for policy-motivated politicians—if political platforms are further apart, the benefit from not seeing your opponent in office increases, and so does the temptation to engage in political budget cycles. This, too, is corroborated in data across OECD countries, with polarization measures based on expert assessments of political parties. The notion that the size of political budget cycles increases as the value of holding office increases could also explain the findings of Alesina, Troiano, and Cassidy (2015), who find that older incumbents run larger preelectoral budget cycles in Italian local governments, and of Aidt, Veiga, and Veiga (2011), who theorize and provide empirical evidence in favor of the notion that political budget cycles increase as incumbents’ win margins grow narrower.

Fiscal transparency, like electoral rules, is part of a broader set of institutions that, by setting the rules of the game, affect incentives and opportunities for engaging in electoral budget cycles. Rose (2006) finds that fiscal rules, notably restrictions on carrying deficits into the next fiscal year, limits the size of the political budget cycle across U.S. state governments. Wehner (2013) finds a similar cycle-decreasing effect of budgetary institutions for the Swedish legislature. One concern about institutional measures has to do with implementation, as pointed out by Streb and Torrens (2013), among others—for example, if rules are less diligently enforced under unified government, the actual effectiveness of such rules may differ across units.

Another approach within the framework of conditional political budget cycles focuses on general regime dynamics and the role of citizens’ democratic experience. Brender and Drazen (2005) argue that political budget cycles are present only in new democracies. For a large panel of countries, they provide empirical evidence that the size of the political budget cycles seems to decrease with countries’ democratic experience and find that measures of voter information, such as those employed by Shi and Svensson (2006), lose explanatory power once the age of democracy is controlled for. The effect of being a new democracy on the existence of political budget cycles is also identified by Barberia and Avelino (2011) for Latin American countries, although this is not entirely robust to alternative measures of democracy. This “new democracy” approach to political budget cycles, together with single-country studies of new democracies such as Akhmedov and Zhuravskaya (2004) and Kwon (2005), has spurred an independent research agenda that has both validated and questioned the argument that the age of democracy matters for political budget cycles (de Haan & Klomp, 2013, pp. 392–393). In a recent metaregression study of political budget cycles, Cazals and Mandon (2015) find some confirmation that established/experienced democracies are less likely to experience political budget cycles.

Hanusch and Keefer (2014) provide an alternative interpretation of the association between size of political budget cycle and the age of a democratic regime. They argue that younger parties tend to run larger electoral budget cycles in spending than do older and more established parties. Based on an argument that younger parties are less able to make credible policy commitment to voters and are more prone to rely on direct vote buying (and thus to run larger political budget cycles), they show in a panel of democratic countries that average party age for the largest four parties lowers the level of election-year spending increases. They also argue and provide statistical evidence in favor of party age being the relevant factor between the age of democracy and the size of political budget cycles.

The vast majority of studies on conditional budget cycles consider only domestic conditional factors, but exceptions to this national focus exist. O’Mahony (2011), in a study of political budget cycles in OECD countries, examines the influence of domestic factors related to international economics, such as exchange rate regimes and the level of international openness on the existence and scope of political budget cycles in public debt. Another exception to the pure national focus is Hyde and O’Mahony (2010) who, in a study of political budget cycles in 94 developing countries in the years 1990–2004, find evidence that electoral budget cycles are greater when there is foreign electoral monitors present in the country at the time of the election, and are smaller when the country is under an International Monetary Fund (IMF) program. The explanation for the first finding is argued to be that fiscal manipulation becomes more attractive for incumbent governments when direct electoral fraud is harder, as is the case with increased electoral monitoring, but could also reflect reverse causality, with election monitors going to places that are already suspected of having electoral irregularities. The argument for the latter is that IMF involvement can both directly constrain a government fiscally and provide an informational channel to international markets, in line with the general argument that increased fiscal and general societal information and transparency decrease political budget cycles.

As the findings from Hyde and O’Mahony (2010) suggest, the size and occurrence of budget cycles might also depend on whether the government is actually able to fund these cycles, a factor that most empirical studies of political budget cycles tend to ignore. Recent research by Klomp and de Haan (2016) and Aaskoven (2016a) suggest that the size and occurrence of political budgets might increase with oil and general natural resource rents, which the government can use more freely to increase electoral-year public spending, and the extent to which these rents are put toward generating political budget cycles also depends on conditional factors, including fiscal transparency.

Another often-neglected factor that could condition the existence, size, and instruments manipulated would be the types of voters that the policymaker would wish to target with the fiscal manipulation. Consistent with this view, Aidt and Mooney (2014), in a study of political budget cycles in early 20th-century London, exploit the extension of the franchise in the United Kingdom in 1918 and find that different fiscal policy instruments were manipulated in election years during different suffrage regimes. While election years saw decreases in taxes and administration when the suffrage was limited to taxpayers, election-year increases in capital expenditure began appearing after the introduction of universal suffrage. In a study also concerned with the incentive of an incumbent policymaker and the choice of fiscal instruments, Chang (2008) looks at how electoral institutions affect the choice of fiscal instrument to be manipulated before elections. Using data from 21 OECD countries, the study’s results show an electoral cycle in social welfare spending in proportional electoral systems while there exists a cycle in geographically targetable public spending under a single-member district electoral system. This finding is consistent with the classic research agenda on the role of electoral systems in the level and type of public spending (Persson & Tabellini, 2003a; Milesi-Ferretti, Perotti, & Rostagno, 2002), an agenda that has also been expanded to electoral cycles (Persson & Tabellini, 2003a, 2003b).

Generally, the fact that the occurrence and size of political budget cycles depend on conditional factors has become an established approach in the literature, and several recent review articles of political budget cycles take this approach to the study of political budget cycles (de Haan & Klomp, 2013a; Alt & Rose, 2007). As summed up by Klomp and de Haan (2013a, p. 338), the occurrence of a political budget cycle seems to be “conditional of the level on the level of development and democracy, government transparency, the country’s political system, its membership of a monetary union, and its degree of political polarization”. However, given the high degree of correlation between these conditional factors, separating their independent effects from each other is an empirical challenge. For example, democracy and government transparency might be endogenously correlated, which is also the case for economic development and democracy. Membership for a monetary union might also be endogenous to government transparency and level of democracy. Furthermore, knowing exactly which mechanisms are driving the conditionality remains far more elusive. These issues have implications for both the theoretical framework of conditional budget cycles and the empirical findings of the literature, which generally rely on purely observational data, where issues of endogeneity remain.

Budget Cycles at the Subnational Level

Most early empirical studies of political budget cycles have relied on either aggregate data from single countries or a cross-country approach. However, comparing countries that differ along a number of dimensions, all of which cannot be differentiated by fixed effects, is difficult, particularly when many of the conditioning variables are closely correlated. By contrast, subnational governments are embedded in similar political environments, seldom are subject to concerns about endogenous election dates, often are large in number, and can, with good time series data, provide an attractive testing ground for theories of political budget cycles, even at the expense of generalizability to different political regimes or settings.

Early contributions such as Mouritzen (1991) have found cycles in public expenditures in Danish municipalities, and recent years have seen a considerable increase in studies looking at political budget cycles in subnational political and administrative units, such as municipalities, cities, counties, states in federal systems, and even electoral districts, to the extent that newly published articles on political budget cycles that use data from subnational units now seem to outnumber articles using a single-country or comparative data structure. The majority of papers in this part of the literature are empirical, and while most rest on the general theoretical framework of political budget cycles, others, including Aidt, Veiga, and Veiga (2011) and Drazen and Eslava (2010), expand the theoretical framework of political budget cycles and use subnational units as testing grounds for these theoretical extensions of the general argument.

Political budget cycles have been detected in public spending and deficits in, among other places, Canadian provinces (Blais & Nadeau, 1992), in public expenditures in Portuguese municipalities (Veiga & Veiga, 2007), in public debt in Flemish municipalities (Geys, 2011) and, as noted previously, for deficits in U.S. states (Rose, 2006). Foucault, Madies, and Paty (2008), in a study of French municipalities, also find evidence of an electoral cycle in local public spending, with per capita municipal spending being greater in the year just before an election. In non-OECD countries, subnational political budget cycles have been detected in Brazil (Sakurai & Menezes-Filho, 2011), Colombia (Drazen & Eslava, 2010), and India (Baskaran, Min, & Uppal, 2015). The empirical evidence generally supports the occurrence of political budget cycles at the local level, and often the occurrence and magnitude of these local political budget cycles are also conditional on institutional and economic-structural factors, including local fiscal transparency (Vicente, Benito, & Bastida, 2013).

In addition to looking at the occurrence of political budget cycles in decentralized subnational units, a more recent strain of the political budget cycle literature looks at the relationship between political budget cycles and the level and structure of fiscal decentralization itself within countries. In a study of Israeli municipalities, Baskaran, Blesse, Brender, and Reingewertz (2015) find that political budget cycles increase when municipalities rely more on external funding rather than their own revenue; presumably, citizens in municipalities that rely heavily on transfers view deficits as a sign of future transfers rather than as a sign of future extra tax payments, which increases the value of running deficits in election years for incumbents, echoing the more general discussion about moral hazard in the study of fiscal federalism and decentralization (Rodden, 2002). In a more general discussion about fiscal decentralization and its effect on political budget cycles, Gonzáles, Hindriks, and Porteiro (2013) develop a model of political budget cycle occurrence in which decentralization might increase the occurrence of political budget cycles dependent on the value from holding office, with high value from office holding resulting in a large risk of political budget cycles. Another recent example of a political budget cycle paper that uses a subnational setting is by Alesina and Paradisi (2014), who use a local, but centrally imposed, real estate tax in Italy to study political budget cycles in Italian cities.

In sum, there is strong evidence for the existence of political budget cycles in subnational units, where they may even be more prevalent than at the national level. As is true across countries, subnational political budget cycles also seem to be conditional on structural, institutional, and political factors. However, the specific policy instrument in these subnational political budget cycles studies varies from study to study, as does the specific timing of the top of the cycle.

Electoral Cycles in Alternative Policy Measures

Most empirical studies of the political budget cycle have focused on spending items, tax levels, and/or fiscal deficits. Some studies look in more detail at spending categories and composition, with one argument being that the government can use expenditure shifting to signal preference alignment with voters (Drazen & Eslava, 2010) or, alternatively, that the government in election years shifts public expenditures toward more visible types of expenditures with short-term benefits for voters, at the expense of less visible types of spending with longer-term benefits, which should cause an increase in public wages and subsidies near elections, at the expense of capital spending (Vergne, 2009; Katsimi & Sarantides, 2012). In a recent study of political budget cycles in expenditure shifting within the context of Brazilian local governments, Klein and Sakurai (2015) find that elections induce first-term—but not second-term—mayors to increase capital expenditures and decrease taxation and discretionary current expenditure, leaving the total budget balance unaffected, possibly in order to comply with Brazil’s Law of Fiscal Responsibility. These results again suggest that elections might affect the composition of public spending rather than aggregate spending and budget balances, and that institutional factors matter for the existence of political budget cycles.

Rather than just looking at purely numerical values of government finances, some studies look at political cycles in more direct measures of government activity and policy, including Foremny and Riedel (2014), who find that German local business statutory tax rates decrease in years of local elections. A number of studies have focused on public employment, where a growing number of studies have detected electoral cycles (Dahlberg & Mörk, 2011; Tepe & Vanhuyesse, 2009, 2013; Stolfi & Hallerberg, 2015; Bee & Moulton, 2015). Most of these papers focus on subnational governments, where data on public employment are generally more readily available and often also directly comparable. Exceptions that study political cycles in public employment at a comparative level include Katsimi (1998) and Aaskoven (2016b), who detect electoral cycles in public employment in OECD countries. However, the latter study finds that this cycle seems to be contingent on GDP growth and fiscal transparency.

Another strategy for an incumbent government might be to manipulate different instruments at different times. Treisman and Gimpelson (2001), in a study of Russian elections in the 1990s, find that the choice of policy item to be expanded/manipulated before elections changed from election to election, which is consistent with the view of Brender and Drazen (2005), described previously, that voter experience with electoral democracy renders some types of preelectoral fiscal manipulation unattractive for incumbents.

Regarding political cycles in more exotic policy instruments, electoral cycles have been detected in electricity losses in India (Min & Golden, 2014), in politicians’ outside activities (Geys, 2013), and in hiding political rents from natural resources (Andersen, Johannesen, Lassen, & Paltseva, forthcoming). Spyros and Christodoulakis (2011), in an analysis of Greece, find that levels of tax evasion and wildfire damage increase in election years as a result of both government inattention due to campaigning and deliberate attempts to favor certain voter segments.7 Englmaier and Stowasser (2016) find electoral cycles in the lending supply of German saving banks, which are partly controlled by German country politicians, and argue that these cycles might act as substitutes for cycles in public spending.

Electoral Cycles in Budget Data Manipulation

Tufte (1978) discusses a number of universal, or near-universal, limits to the political control of the economy that gives rise to political budget cycles, partly owing from not being within the reach of politics. In particular, “[t]he collection and reporting of economic data—such as the unemployment rate, which sometimes has major political significance, comes to mind as a depoliticized area, despite occasional reports of hanky-panky” (Tufte, 1978, p. 139). His optimism about the lack of hanky-panky notwithstanding, Tufte goes on to recall a number of instances of political release or withholding of data. Such instances may be more widespread than envisioned by Tufte.

In line with Tufte’s initial argument, the large majority of papers in the literature on political business and budget cycles take as given the data on public finances and the economy. But, if incentives exist to manipulate budget decisions with upcoming elections in mind, certainly such incentives can also extend to choosing instruments where opportunistic behavior is less visible, to downright manipulation of economic data, or the presentation of economic data, separate from the actual decisions. Both Shi and Svensson (2006) and Alt and Lassen (2006b), as discussed previously, focus on the availability of information to voters, the former highlighting differences in access to information between developing and developed countries and the latter exploring differences in fiscal transparency within advanced democracies. A small number of recent papers, however, look directly for electoral patterns in data revisions and the use of creative accounting and other types of manipulation of official data.

Faust, Rogers, and Wright (2005) examine revisions of GDP data in the G7 countries and find, confirming earlier anecdotal evidence, a political business cycle in economic data reporting, but only for Japan: Over the period 1970–1997, upcoming elections tended to induce higher GDP projections, to be followed, after the election, by negative adjustments. A similar pattern for budget balances was observed, across the European Union, by Castro, Pérez, and Rodríguez‐Vives (2013). They show that public-sector budget balances for preelection years tend to be revised downward in later budget data releases. Jong-A-Pin, Sturm, and de Haan (2012) examine detailed real-time budget data having political budget cycles as their major focus, and find that while revisions to OECD countries’ overall fiscal balances are not affected by the electoral calendar, both election-year spending and revenues are actually higher than reported in real time.8

Rather than managing and massaging projections and subsequently revising GDP and public budget data, governments can simply shift expenses or deficits off the books, resulting in electorally induced cycles in government creative accounting. In a study of EU countries, Alt, Lassen, and Wehner (2014) find that such fiscal gimmickry, identified from stock-flow accounting, was indeed more prevalent in election years, with the effect augmented by low levels of fiscal transparency in countries subject to fiscal rules. Reischmann (2016), in a study of OECD countries, also finds evidence of government creative accounting before elections.

Together, these findings support a moral hazard interpretation that governments boost spending, cut taxes, or both in order to please voters but, by manipulating projections and preliminary data as well as engaging in creative accounting, do so in a way that makes them appear fiscally competent in the eyes of voters. Manipulation of public accounts might (assuming that voters dislike public deficits) be a way for an incumbent government to attempt to reap the benefits of a real or perceived fiscal expansion without suffering the electoral costs. However, this assumption relates to a wider discussion about whether running election-year deficits actually yields an electoral benefit or an electoral cost for the incumbent government. While Brender and Drazen (2008) argue that voters punish rather than reward election-year deficits, Klomp and de Haan (2013b) argue that running political budget cycles carries an electoral reward for the incumbent government. Conceivably, the degree to which deficits and/or spending increases are rewarded at the polls depends both on whether voters can in fact discern the underlying motivations and abilities of incumbents, and whether such initiatives are consistent with what voters expect from partisan governments (Lowry, Alt, & Ferree, 1998).

Thus, while the collection and reporting of economic data are often assumed to be depoliticized in the majority of the political science and political economy literature, including most of the political budget cycle literature, the research on electorally induced data manipulation shows that political factors, including upcoming elections, can actually influence the reporting of fiscal and economic data. The finding of electoral cycles in creative accounting and general manipulation of government statistics might even bear significance for the study of political budget cycles itself, as cycles in government statistical manipulation could be designed to make the detection of political budget cycles using official government statistics harder. Scholars in the political budget cycle literature thus need to be aware of the timing of their fiscal and economic data and whether the data are projections, and to mind potential data revisions and the timing of these revisions and data projections.

The political and economic implications of official data revisions and government manipulation could even form the basis for an independent research agenda. Recent work by Kayser and Leininger (2015) finds that the media does not pay attention to economic data revisions and, as a result, that voters do not either, which suggests that incumbent governments can have substantial scope for and benefits from manipulating official data. However, as the research by Alt, Lassen, and Wehner (2014) suggests, institutional factors such as fiscal transparency can limit such data manipulation.

Conclusion and Future Avenues for Research

The study of political budget cycles, preelectoral changes in public budgets, and other policy measures by incumbent governments is a vast research area within political science and political economy. An extensive research agenda in the past decades has been to debate both the existence and magnitude of political budget cycles, as well as potential conditional factors that determine their size, existence, or both. The literature has also expanded the research agenda from focusing merely on national budget deficits to also looking at subnational units and looking for electoral manipulation in policy measures beyond the public budget balance. The literature has settled on a number of key insights, but questions for future research, discussed next, remain.

The literature on political cycles has found that manipulation of the macroeconomy, public budgets, and policy measures just before elections occurs in many political systems at both the national and subnational level and in both democratic and autocratic regimes. The evidence also suggests that the extent, level, and type of political cycle vary with different political, economic, and societal conditions. The conditions under which cycles occur include the perceived political value for the incumbent of holding office, the uncertainty of electoral outcomes, and the extent to which voters can scrutinize incumbent behavior. Incumbent politicians show great creativity with regard to policy measures to manipulate, and cycles are found in many different policy measures, which vary over time and place.

Election occurrence is in itself endogenous to cycles in macroeconomic factors in political systems that allow early elections, and this continues to be an empirical challenge for the study of political cycles at the national level, but it is typically not a concern at the subnational level. Macroeconomic and microeconomic factors are themselves affected by elections beyond political manipulation, which can make the detection and separation of causes of political cycles empirically difficult; for example, if voters and/or firms react to electoral uncertainty by decreasing or postponing spending (Julio & Yook, 2012; Canes-Wrone & Park, 2012)—the separation and identification of which can be difficult ex ante—increasing government spending may be an appropriate response in order to keep economic activity up, elections or not. Thus, while electoral cycles in public budgets occur, they may occasionally come about for nonopportunistic reasons.9 Even government financial data can be manipulated due to electoral concerns, which also raises issues for finding evidence of political budget cycles.

While this brief survey has been able to cite but a small share of the literature on political business and budget cycles, it has addressed the main findings and discussions of the literature. However, several open issues of interest for future research remain. They include exploring the mechanisms for the apparent conditionality of political cycles (e.g., whether voter information really is the relevant mechanism for whether incumbents choose to engage in preelectoral manipulation). Another question is whether budget cycles are the result of active decisions involving an active increase (decrease) in public spending (revenue), or whether they are rather passive and instead represent unwillingness by incumbent policymakers to cut public spending and/or increase public revenue near elections. The results found by Wehner (2013), who studies spending amendments to the budget proposal in the Swedish legislature, suggest that budget cycles are at least partly active, but further exploration of this issue could be fruitful.

Another important question for the now-substantial literature on conditional political budget cycles is how to deal with the fact that scholars seem to have discovered more conditioning factors than cases to test the validity of these factors. Furthermore, the high degree of correlation between conditioning factors is a challenge for pinning down the decisive ones. These challenges could be somewhat ameliorated by further subnational studies.

Yet another topic of future research could be to investigate the welfare effects and distributive consequences of political cycles for citizens. This issue is an often-neglected aspect of the study of the political determinants of economic policy (Golden & Min, 2013, p. 88), which is also true in the case of political cycles.

Methodologically, another potential fruitful venue for future research could be the use of natural experiments to determine causality. The vast majority of studies within the political cycle literature have relied on observational data, with little or no attempt to use causal identification strategies such as natural experiments, an approach increasingly used within political science (Samii, 2016). There is a significant scope for adopting causal research designs in the study of political budget cycles, which might improve inference and shed more light on previous findings and theories. A recent attempt to use a natural experiment approach to the study of political budget cycles is by Alesina and Paradisi (2014).

Finally, having identified a number of instances of political budget cycles, future research could revisit the electoral consequences of actually running political budget cycles. While the literature explicitly or implicitly rests on the assumption that fiscal expansion before elections is popular among voters, the empirical evidence is both scarce and mixed (Brender & Drazen, 2008; Klomp & de Haan 2013b). Furthermore, as with political budget cycles themselves, perhaps voter responses to political budget cycles are contingent on institutional and contextual factors.10

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Notes:

(1.) Implicitly or explicitly, this notion assumes that voters engage in some sort of “economic voting” or performance voting, in which they (at least partly) make their vote choice based on the state of the economy (Lewis-Beck & Paldam, 2000) or the perceived competence of the government (Rogoff, 1990).

(2.) The most important variable in the political cycles literature is the occurrence of an election. Most studies use either the year of the election, the preelection year, or both, and some look at the postelection response as well. Some studies use more finely grained measurement of electoral timing such as quarters, while some use time left in office for the current government as a measurement of the complete cycle.

(3.) A Google Scholar search (February 1, 2017) on the term “political budget cycles” gets approximately 3,830 hits, while “political business cycles” yields about 9,980 hits.

(4.) The effect of policy uncertainty on the real economy is a growing literature within economics; see, for example, Julio and Yook (2012) for firm level evidence of the effect of elections on private investment.

(5.) The United Kingdom switched to fixed-term electoral periods with the Fixed-Term Parliamentary Act of 2011. Before this, the prime minister could dissolve the parliament and call for early elections, which were a key feature of many postwar British elections (Smith, 2003, pp. 397–402; Kayser, 2005, p. 25).

(6.) Another related question about early elections, of course, is whether they yield a benefit for the incumbent government. Smith (2003), in a study of British elections, argues that early elections can sometimes hurt an incumbent government, while Schleiter and Tavits (2016), in a study of elections in European countries, find a substantial incumbent electoral advantage for early elections.

(7.) This is because building permits are easier to obtain when a previously forested area has been burned.

(8.) Some have noted that projections from international organizations, especially the IMF, also tend to be overly optimistic, a phenomenon that is perhaps due to political biases in IMF projections (Dreher et al., 2008).

(9.) Barro (1979) presents the general case for optimal government deficits and debt, given ambitions for smoothing consumption.

(10.) The findings by Brender (2003) on fiscal performance and electoral outcomes in Israeli municipalities could suggest such an effect.