Political budget cycles under single party- and coalition governments How the composition of local governments affects opportunistic fiscal policy

Abstract

This paper examines the empirical relationship between political budget cycles (PBCs) and two types of governments; single party- and coalition governments. Most PBC models implicitly assume that governments have unitary preferences and unconstrained control over fiscal policy, as is the case under single-party governments. However, under a coalition government, preferences over fiscal policy might vary significantly. Hence, the ability to implement a PBC may differ depending on the composition of governments, since coalition governments require the agreement of multiple parties to determine fiscal policy. Using a fixed effects model and a panel data set comprising of 283 Swedish municipalities over 24 years, we find that net cost as a share of revenue increases with, on average, 2.03 percentage points under single party governments during election years. In relation to single party governments, the election year effect is 0.62 percentage points lower in municipalities ruled by a coalition government. We find no empirical evidence that the PBC is further moderated by the size of, or the ideological distance within a coalition.