Tilko Swalve
  • Postdoctoral Researcher, University of Hamburg

Strategic Budgeteering

Christina Schneider, Tilko Swalve, Vera Troeger Working Paper

Governments want to be reelected but increasing fiscal transparency has imposed many challenges for them to pursue opportunistic fiscal policies. This paper demonstrates that governments can electioneer even when fiscal transparency is high. We argue that governments can use several strategies to increase public good provision before elections, and they choose the strategies that are most effective given the level of transparency. Whereas deficit spending is an effective strategy to artificially increase voters’ perceived welfare before elections when voters cannot observe these distortionary practices, increasing fiscal transparency makes these strategies more costly (conservative voters would punish the government). Consequently, when fiscal transparency is high governments resort to less visible strategies, such as the redistribution of budgetary resources from long-term efficient investment spending to short-term consumption spending. We test the predictions with data on the composition of government spending for 32 countries over up to 38 years and data on individual budget items for 32 OECD countries over 42 years. The preliminary findings suggest that governments indeed redistribute resources from long-term efficient investment to short-term public goods provision before elections especially if elections are contested.