Politically driven cycles in fiscal policy: in depth analysis of the functional components of government expenditures

NIPE - WP 02/2016

This article analyses the incidence of politically driven cycles on the functional components and sub-components of government expenditures over a group of 18 European countries during the period 1990-2012. An LSDVC estimator is employed in the empirical analysis. The results point out to the presence of political opportunism at aggregated and disaggregated levels of public expenditures, but no significant evidence of partisan or other political effects is found. The expenditure components that have proved to be more related to that behaviour are public services, health, education and social protection. These include items able to generate more visible outcomes to voters and, consequently, of increasing government’s chance of re-election.

The authors acknowledge helpful comments and suggestions from Mustafa Yeter, Toke Aidt and the participants in the Political Economy Workshop, Jesus College, University of Cambridge, UK, 4 December 2015. Vitor Castro also wishes to thank the financial support provided by the Portuguese Foundation for Science and Technology under the research grant SFRH/BSAB/113588/2015 (partially funded by COMPTE, QREN and FEDER).