Fragmented government effects on fiscal policy: new evidence

Most industrialized countries entered the 1980s with their public finances in disarray. At the time, persistent deficits pushed up public debt-to-GDP ratios. Despite such similarities, deficit spending varies substantially between countries and within countries over time. Recent theoretical and empirical research has considered how differences in political arrangements affecting national policy formation might explain variation in fiscal policies pursued. Using a panel of 22 OECD countries over the 1971-1996 period this paper extends previous literature on the effects of fragmented government on fiscal policy outcomes in various directions. First, we focus on data relating to central government instead of general government as all theories refer to central government. Second, not only do we analyze the effect of size fragmentation of government, we also examine government's position vis-à-vis parliament and government's political fragmentation. We find evidence that more fragmented government (defined in terms of the number of political parties in a coalition or the number of spending ministers) have higher deficits. There is also some evidence that governments that dispose of excess seats in parliament have lower deficits. Right-wing governments appear to have been fiscally more responsible in the seventies. Political fragmentation does not affect government's budget deficit.