Fiscal Supervision and Party Politics: Lessons from Austria and Germany

Models of effective fiscal supervision usually assume neutral and benevolent overseers. In reality, fiscal supervisors often lack such independence. If overseers and supervised officials are partisan, party favouritism and politics may replace other objectives. The two case studies discussed in this chapter show empirically how political alignment influences fiscal supervision. Austrian and German state authorities continuously and tightly supervise local governments, but fiscal supervisors are affiliated with political parties. In some Austrian federal states, the law explicitly allocates left-wing mayors to a left-wing member of the state government as fiscal supervisor and right-wing mayors to a right-wing overseer. This chapter presents evidence that such a setting induces collusion and contributes to less sustainable budgeting. In Germany, the influence of party politics in fiscal supervision of local governments is more subtle but still sizable. It is furthermore evident that fiscal supervisors in both countries use supervision policies to realise their party agendas.