Party Alignment and Political Budget Cycles: The Argentine Provinces

Abstract

The links between subnational political budget cycles (PBCs) and the national government in federal countries have seldom been studied. We study the behavior of the budget balance, public expenditures, and revenues in Argentine provinces during the 1985-2001 period. We find that in election years public expenditures increase, but revenues also do -a result exactly contrary to the predictions of rational opportunistic models of aggregate PBCs -and the budget deficit does not increase significantly. Since the increase in provincial revenues is due to larger federal transfers, we incorporate the influence of party alignment between governors and president. Public expenditures in election years increase in aligned provinces because of larger federal transfers, without affecting the budget deficit; in contrast, the budget deficit tends to increase in unaligned provinces. The federal government thus plays a key role in subnational PBCs, with an electoral cycle in the allocation of federal transfers. JEL classification codes: D72, E62

Political business cycles 40 years after Nordhaus

“…In Alpanda and Honig (2010), the government is constrained in generating a PBC by its borrowing capacity. Finally, endowment in natural resources can play a role (Vergne 2009).political alignment or affiliation (i.e., when local and national executives belong to the same party) as shown in Lema and Streb (2013) and Rumi (2014), the strength of political parties (Shelton 2014) and the strength of the incumbent government, a divided or fragmented government being less able to generate a PBC because of coordination costs ( …”

Incentives to local public service provision: An evaluation of Italy's Obiettivi di Servizio

“…• Political alignment is relevant as long as the regional level depends financially on the central level, as is the case in Italy. The main implication of this dependency is that central government can channel more resources (over and above those relating to ODS) to politically aligned sub-national governments in order to maintain political power, as documented also by Bracco, Lockwood, Porcelli, and Redoano (2015), Kang (2015), Rumi (2014), and Lema and Streb (2013). Since these financial resources are fundamental for public expenditure on LPS, politically aligned regional governments could have had some benefit from reaching the ODS targets.…”

Electoral Opportunism and Vertical Fiscal Imbalance

“…PBC at subnational level is also obtained by Lema and Streb (2013) for Argentine provinces in the period 1985-2001. Their emphasis is on the influence of the federal incumbent on provincial PBCs.…”

“…This is rather surprising given the prominent literature highlighting the impact of vertical fiscal imbalance on fiscal discipline (see, for example, Rodden 2002Rodden , 2006. Only the previously mentioned paper by Lema and Streb (2013) in their investigation on Argentina called the attention on the role of discretionary transfers from the central government to feed district's PBCs, but their emphasis is on political alignment between incumbents at national and subnational level rather than the structure of Argentine federalism. Jones et al (2012) emphasize the role of vertical fiscal imbalance on Argentine gubernatorial electoral results.…”

“…Even in a scenario of weak party obedience, allied governors may take advantage, in terms of electoral results, of supporting national policies aimed at controlling spending and the fiscal deficit. However, same party affiliation between President and governors may imply additional resources for governors, as reported for Lema and Streb (2013), or different (better) kind of resources for allies as noted by Rumi (2013). To capture the effect of alignment between incumbents at national and subnational level, I include the dummy variable ALIGNMENT, which takes the value 1 if the governor of a given province is allied with the President and 0 otherwise.…”