Electoral Opportunism and Vertical Fiscal Imbalance

Abstract

Evidence of political budget cycles from crosscountry studies has been rationalized as coming from the voters' cost to process the available information and asymmetric information. This explanation has also been adopted in most cross-province studies, leaving aside variables related to the incentive structure of fiscal federalism. This paper investigates electorally induced fiscal fluctuations in Argentina for the period 1985-2007. Provincelevel dynamic panel data reveal that vertical fiscal imbalances in subnational districts fuel fiscal expansion and changes in expenditure composition, favoring current expenditure to the detriment of investment, in election years. Vertical fiscal imbalances make electoral opportunism cheaper and more profitable.

Federalism, but how? The impact of vertical fiscal imbalance on economic growth. Evidence from Belgium*

“…Fiscal competition between subnational units with tax autonomy can lead to fiscal self‐responsibility and less public spending at the subnational level. But if subfederal governments depend on central government transfers and VFI is high, then soft budget constraints and common pool problems will lead to cheaper electoral opportunism, the flypaper effect, overspending, a shift of resources from public investment toward current expenditure, increased corruption, and resource misallocation (Azfar & Cadwell, 2003; Bordignon et al, 2013; Brollo et al, 2013; Eyraud & Lusinyan, 2013; Fisman & Gatti, 2002; Gadenne, 2017; Jin & Zou, 2002; Karpowicz, 2012; Knutsen et al, 2017; Kotsogiannis & Schwager, 2006; Martinez, 2019; Meloni, 2016; Shah, 1999; Shleifer & Vishny, 1993; Vicente, 2010; Weingast, 2009; Weingast, 2009).…”

“…VFI occurs when spending decentralization outpaces revenue decentralization, so that subnational governments have to rely on central government transfers and borrowings to finance local expenditure. VFI makes electoral opportunism cheaper and more profitable while hindering subnational accountability and sound fiscal performance (Karpowicz, 2012; Meloni, 2016).…”

Priorities for the Distribution of Interbudgetary Transfers Under the Conditions of Fiscal Decentralization in Ukraine

“…O. Meloni connects the failures of fiscal decentralization with the opportunistic behavior of the electorate [19]. The risks of opportunistic behavior of the electorate are higher in those countries where there is greater dissatisfaction with the policies of the central government.…”

Political budget cycles and voting within a federal country: The influence of political alignment

“…There is ample evidence of PBCs from cross-country panels(Persson and Tabellini, 2003;Brender and Drazen, 2005;Shi and Svensson, 2006;Alt and Lassen, 2006;Streb, Lema, and Torrens, 2009) and within-country panels in federal countries (for established democracies:Petry et al, 1999;Galli and Rossi, 2002;Rose, 2006; for emerging democracies:Gámez and Amarillas, 2014;Meloni, 2016).3 From the electoral competition view, preferred districts could be loyal (i.e., states that heavily supported the incumbent president in past presidential elections) or swing (i.e., states with narrow vote margins). Additionally, there is evidence that the national incumbent favors politically aligned districts (i.e., states whose governor, or whose majority delegation in the House, belongs to the same party as the president) and that this interacts with being loyal or swing.…”