Budgets, expenditure composition and political manipulation

Abstract

This paper analyses the presence of political cycles in Portuguese Governments’ expenditures using monthly data over the period 1991–2013 for the main categories of government expenditures. The results indicate that Portuguese Governments act opportunistically regarding the budget surplus and that they favour capital instead of current spending near to the elections. Moreover, right-wing governments are more prone to reduce expenditures and deficits after the elections than left-wing ones. A deeper disaggregated analysis of the components of government expenditures corroborates these findings while disentangling other relevant patterns of political manipulation in Portugal.

Keywords:

• Political budget cycles
• expenditure composition
• Portugal
• elections
• fiscal policy

JEL classification:

• H72
• D72
• D78

Acknowledgements

The authors acknowledge helpful comments and suggestions from the participants at the NIPE’s Seminar, University of Minho, Portugal, 22 January 2014; the 2014 Meeting of the European Public Choice Society, University of Cambridge, UK, 3–6 April 2014; the 8th Annual Meeting of the Portuguese Economic Journal, University of Minho, 4–5 July 2014; and the INFER Workshop on Heterodox Economics, Faculty of Economics, University of Coimbra, 17–18 April, 2015.

Notes

1. There have been studies at the local/municipal level in Portugal, namely Veiga and Pinho (2007) and Veiga and Veiga (2007a, 2007b).

2. The partisan model generates policy effects after elections, while the opportunist model generates policy effects before elections.

3. For empirical evidence on election-motivated expenditure shifts see, for instance, Katsimi and Sarantidis (2012).

4. Also at local level, Veiga and Pinho (2007) analyse the political determinants related to the allocation of intergovernmental grants and Veiga and Veiga (2007b) find that there is an electoral payoff to opportunistic investment expenditures.

5. Note that total government expenditures is equal to current plus capital government expenditures, therefore, CapExpd = 1−CurrExpd. The ratios are used in the empirical analysis because, contrary to their levels, they are stationary (see stationarity tests in Table A.4 in Annex).

6. We have seven national elections in our sample period, which are the following (with the respective changes in the political orientation of the government): 06 October 1991 (no change: right government in office); 01 October 1995 (change in government from right to left); 10 October 1999 (no change: left government in office); 17 March 2002 (change in government from left to right); 20 February 2005 (change in government from right to left); 27 September 2009 (no change); 05 June 2011 (change in government from left to right).

7. ADF and PP unit root tests reported in Table A.4 in Annex indicate that it is the first difference in the unemployment rate that is stationary. The other variables are not following a unit root process.

8. As mentioned above, CapExpd = 1−CurrExpd by definition. This means that there is symmetry in the effects when the variable CurrExpd replaces CapExpd in the regressions. Hence, there is no need to replicate those results here, since the respective coefficients will be the same (as well as the respective standard errors) but with symmetric signs.

9. More specifically, half a year before election this ratio increases by around 1.9 percentage points, while during the six month period after the election it decreases by about 2.3 percentage points. For longer periods before the elections, no significant coefficients were found; after the elections, we found some significant effects but only marginal until nine months after the election.

10. A period of 12 months after the election is chosen because it is the one that presents the lowest p-value for the respective estimated coefficient.

11. The complete set of results for the estimation of each individual regression – with the respective expenditure component as dependent variable – is available upon request.

12. On this matter see, for instance, Potrafke (2011b) and Herwartz and Theilen (2017).

13. However, in 2009 – a year of legislative elections in Portugal – Socialist Prime Minister José Socrates announced a 2.9% increase in the wages of civil servants. This was the largest wage increase since the start of this century and the first in three years. This was viewed as an attempt to improve the government’s popularity. Although we do not find evidence of such behaviour across our sample, it is an example of both opportunistic and partisan behaviour, since expenditures on personnel are expected to increase more with left-wing governments.

14. Those results are not presented here due to space limitations, but they are available from the authors upon request. In particular, in those regressions in which Rpart# and CRPart# were found to be jointly significant (Personnel and Current Transfers), we tested the null that the sum of their coefficients was zero. Test results did not rejected the null, so we conclude that there are no rational partisan effects found in the referred components. Moreover, we also checked some interaction effects upon public expenses depending on the level of either unemployment or inflation while a rightist or a leftist party is in office, but no relevant interaction effects were found.